<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 13, 1996
REGISTRATION NO. 333-14981
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 8351 04-2949680
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
ONE KENDALL SQUARE, BUILDING 200,
CAMBRIDGE, MASSACHUSETTS 02139, (617) 577-8020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROGER H. BROWN, CHIEF EXECUTIVE OFFICER
ONE KENDALL SQUARE, BUILDING 200,
CAMBRIDGE, MASSACHUSETTS 02139, (617) 577-8020
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
ALFRED O. ROSE, ESQ. LESLIE E. DAVIS, ESQ.
ROPES & GRAY TESTA, HURWITZ & THIBEAULT, LLP
ONE INTERNATIONAL PLACE 125 HIGH STREET
BOSTON, MASSACHUSETTS 02110-2624 BOSTON, MASSACHUSETTS 02110
(617) 951-7000 (617) 248-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DECEMBER 13, 1996
Shares
LOGO
Common Stock
--------
Of the shares of Common Stock offered hereby, shares are being
offered by Bright Horizons Children's Centers, Inc. ("Bright Horizons" or the
"Company") and 850,000 shares are being offered by the Selling Stockholders.
The Company will not receive any proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders." Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "BRHZ."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(3)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $
</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the offering payable by the Company estimated
at $ .
(3) The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to an additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price
to Public shown above. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ , and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
Alex. Brown & Sons
INCORPORATED EVEREN Securities, Inc.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
"The Bright Horizons mission is to create innovative child care programs that
help young children reach their full potential. Every day we must strive to:
honor each child's unique capacities; support families as partners; respond to
our corporate sponsors; help one another grow professionally; and build an
economically healthy organization. We aim to do this so successfully that we
have a tangible impact on the well-being of children in this country."
--Bright Horizons Mission Statement
[PHOTOGRAPHS OF CHILD CARE CENTERS IN OPERATION]
------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and with quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors." The Company's fiscal year ends on June 30. All references to fiscal
years in this Prospectus refer to the fiscal years ending in the calendar years
indicated (e.g. fiscal 1996 refers to the fiscal year ended June 30, 1996).
THE COMPANY
Bright Horizons operates the largest number of corporate-sponsored work-site
child care centers in the United States, with 130 work-site child care centers
providing care and education to more than 11,000 children. Demographic changes,
particularly the increasing percentage of mothers in the work force, have
driven significant growth in the market for child care services. A growing
number of corporations, hospitals, government agencies and universities sponsor
work-site child care centers in order to increase the productivity, loyalty and
commitment of their work forces and to gain a competitive advantage in
recruiting and retaining talented employees. Corporate sponsor support enables
Bright Horizons to limit its start-up and/or operating costs and to concentrate
its investment in those areas that directly translate into high-quality child
care, specifically faculty compensation, high teacher-child ratios, curricula,
continuing faculty education, facilities and equipment. The Company currently
provides work-site child care services to major corporate sponsors, including
IBM (two centers), Motorola (four centers), Salomon Brothers, Glaxo Wellcome
(three centers), DuPont, Warner Bros., MCA/Universal, Mattel and well-known
institutions such as New York Hospital, Beth Israel Deaconess Medical Center
and The George Washington University.
The market for child care services in the United States is large and
experiencing a shift toward center-based child care. According to industry
sources, approximately $27 billion was spent on child care services in 1994,
including nannies, relatives, family child care (services operated out of a
caregiver's home) and center-based child care (work-site and residential child
care centers, full- and part-time nursery schools and church-affiliated and
other not-for-profit providers). Although the number of births has remained
relatively constant since 1990, the child care market has continued to grow
steadily, driven primarily by the increasing percentage of mothers in the work
force. Today, over 60% of mothers with children under six are in the work
force, compared to 22% in 1960. Among college-educated women, 70% of mothers
with children under one are in the work force. Center-based child care has
gained significant market share in the overall child care market over the last
20 years. The Company believes that parents, particularly well-educated, dual-
income couples, prefer the greater reliability, better facilities and adherence
to licensing standards offered by center-based child care providers.
Corporate-sponsored work-site child care, which emerged in the late 1980s,
offers distinct advantages to parents and corporate sponsors over other forms
of center-based child care. Financial support from corporate sponsors enables
Bright Horizons to devote greater resources to the quality of care than
residential center-based child care chains. Parents are able to participate in
their child's ongoing care and education and monitor quality by visiting the
work-site center during the work day. Work-site centers are often the most
convenient child care option for parents with respect to commuting and work
schedule needs. Corporations and other employers benefit from work-site child
care due to higher employee productivity, loyalty and commitment. As
corporations have recognized that child care benefits can be a powerful
employee recruitment and retention tool, the percentage of corporations
providing some form of child care assistance has increased dramatically.
3
<PAGE>
Bright Horizons believes its business model is more attractive than other
types of center-based child care. The Company believes that the work-site
segment is growing more rapidly than other segments of the child care market.
Bright Horizons centers achieve favorable returns on investment, in part due to
the reduction in start-up and/or operating expenses that result from the
various forms of corporate sponsor support, which can include construction of
the center, reduced occupancy costs, capital equipment and tuition assistance.
A corporate sponsor's selection of Bright Horizons is perceived as an
endorsement of the Company's capabilities in providing high quality child care
and enhances the Company's ability to market its services directly to the
sponsor's employees. The Company is well-positioned to serve corporate sponsors
due to the Company's national scale, established reputation, position as a
quality leader and track record of serving major corporate sponsors.
Bright Horizons' mission is to be a quality leader in the education and care
of young children. Bright Horizons operates its centers to qualify for
accreditation under the stringent criteria developed by the National
Association for the Education of Young Children ("NAEYC") and has more NAEYC-
accredited work-site child care centers than any other work-site provider.
Bright Horizons believes that its center directors' experience and education
are exceptional compared to most directors of residential center-based child
care chains. A typical Bright Horizons center director has more than ten years
of child care experience and a college degree in an education-related field and
over one third of Bright Horizons' center directors hold advanced degrees. The
Company is able to attract and retain highly qualified center directors and
faculty by offering compensation more than 30% and 10%, respectively, above the
for-profit industry average (based upon the 1995 Cost, Quality, and Child
Outcomes in Child Care Centers Study) and by offering a benefits package that
is unusually comprehensive and affordable by industry standards. Corporate
support enables the Company to devote considerable resources to developing
"child-friendly" facilities which include child-sized amenities, indoor and
outdoor play areas of age-appropriate materials and design, family hospitality
areas, and computer centers.
Bright Horizons' innovative, age-appropriate curricula distinguish it in an
industry typically lacking educational programs. The Company is committed to
improving upon the typical child care experience by creating a dynamic and
interactive environment that stimulates learning and development. As part of
its comprehensive curricula, the Company has developed the proprietary
Language Works! preschool curriculum which facilitates mastery of language by
early exposure to words and symbols, extensive use of language in all activity
areas, composition of books, and immersion in literature. Bright Horizons is
currently advised by several education experts, including Dr. T. Berry
Brazelton, Dr. Ed Zigler and Dr. Sharon Lynn Kagan of its Advisory Board and
Dr. Sara Lawrence-Lightfoot of its Board of Directors.
The key elements of the Company's growth strategy are to: (i) open centers
for new corporate sponsors, (ii) increase revenue from existing corporate
sponsor relationships by opening new centers and adding new services, (iii)
assume the management of corporate-sponsored centers that are currently
operated by sponsors or other child care providers, (iv) acquire smaller work-
site child care networks capable of providing high-quality care and (v) market
additional, complementary child care and educational services. The Company
added 37 new centers in fiscal 1996, including the acquisition of 24 GreenTree
Child Care Services, Inc. ("GreenTree") centers from The ServiceMaster Company,
L.P. ("ServiceMaster"). Bright Horizons anticipates adding 20 to 25 new centers
in calendar 1997.
Bright Horizons' home office is located at One Kendall Square, Building 200,
Cambridge, Massachusetts 02139 and its telephone number is (617) 577-8020.
Bright Horizons was incorporated in Delaware in 1986.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company........... shares
The Selling
Stockholders............ shares
Total............... shares
Common Stock to be
outstanding after the
offering............... shares(1)(2)
Use of proceeds......... Repayment of indebtedness, working capital and other general
corporate purposes, including possible acquisitions.
Proposed Nasdaq National
Market symbol.......... BRHZ
</TABLE>
- --------
(1) Based upon the number of shares outstanding as of November 30, 1996.
Excludes (i) 308,252 shares of Common Stock reserved for issuance upon
exercise of options outstanding with a weighted average exercise price of
$3.31 per share, (ii) 40,000 shares of Common Stock reserved for issuance
upon exercise of the warrant issued to ServiceMaster at an exercise price
of $17.50 per share and (iii) 200,000 shares of Common Stock reserved for
future grants of Common Stock or options to purchase Common Stock under the
Company's Equity Incentive Plan. See "Management--Stock Plans."
(2) Gives effect to the conversion of all outstanding shares of the Company's
Series A Mandatorily Redeemable Convertible Preferred Stock, Series B
Mandatorily Redeemable Convertible Preferred Stock, and the Series C
Mandatorily Redeemable Convertible Preferred Stock (collectively, the
"Convertible Preferred Stock") into an aggregate of 1,860,330 shares of
Common Stock and the exercise of outstanding warrants (which would
otherwise terminate upon the closing of the offering) into 168,952 shares
of Common Stock. See Notes 7 and 8 to Consolidated Financial Statements.
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------- ---------------
1992 1993 1994 1995 1996(1) 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues.......... $17,060 $23,812 $32,012 $43,693 $64,181 $11,932 $19,713
Gross profit.......... 1,958 3,201 4,420 6,484 8,566 1,465 2,498
Selling, general and
administrative
expenses............. 2,905 3,034 3,578 5,174 6,376 1,259 2,049
Amortization of non-
compete
agreements(2)........ -- -- -- 80 1,680 87 140
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations......... (947) 167 842 1,230 510 119 309
Net income (loss)(3).. $ (889) $ 153 $ 1,144 $ 1,633 $ 1,321 $ 565 $ 121
Net income (loss)
per share(4)......... $ 0.51 $ .05
Weighted average
number of common and
common equivalent
shares(4)............ 2,597 2,592
SELECTED OPERATING DATA:
Number of child care
centers at end of
period............... 41 54 72 87 124 90 129
Licensed capacity at
end of period(5)..... 3,379 4,625 6,318 7,607 12,638 8,162 12,900
Average utilization
rate(6).............. 72.5% 76.4% 75.2% 75.7% 76.2% 69.5% 74.3%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(7)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 852
Total assets......................................... 24,637
Long-term debt and capital lease obligations,
net of current portion............................ 4,271
Mandatorily redeemable convertible
preferred stock................................... 18,881
Total stockholders' equity (deficit)................. $(11,367)
</TABLE>
- --------
(1) Effective December 1, 1995, the Company acquired the business and some of
the assets and liabilities of GreenTree. Fiscal 1996 results include seven
months of GreenTree operating results. If the Greentree acquisition had
occurred on July 1, 1995, the Company's pro forma net revenues, gross
profit, net income and net income per share for fiscal 1996 would have been
$70.4 million, $8.8 million, $988,000 and $0.38, respectively. The pro
forma data do not purport to represent what the Company's results of
operations actually would have been had such transactions and events
occurred on the dates specified, or to project the Company's results of
operations for any future period or date. See "Unaudited Pro Forma Combined
Financial Data" on page F-26.
(2) In connection with the acquisitions of Burud & Associates, Inc. ("Burud")
in fiscal 1995 and GreenTree, the Company received agreements from the
sellers not to compete with the Company for a certain time period.
Accordingly, the Company recorded intangible assets for the non-compete
agreements, which are being amortized over the expected period of benefit.
The Company anticipates recording amortization expense associated with
these non-compete agreements of $560,000 and $280,000 in fiscal 1997 and
fiscal 1998, respectively.
(3) Reflects the benefit of net operating loss carryforwards in fiscal years
1994, 1995 and 1996, and in the three months ended September 30, 1995.
(4) Calculated on the basis described in Note 1 to Consolidated Financial
Statements. The earnings per share data, after giving effect to the number
of shares required to be issued in order to repay the debt and the
concomitant reduction in related interest expense (tax-effected), is the
same as the earnings per share data presented.
(5) Represents the total capacity permitted under applicable state licenses.
(6) Calculated as the total tuition revenue earned during the period divided by
the total potential tuition revenue, assuming 100% occupancy and full-time
tuition rates for each age group at each center.
(7) As adjusted to reflect (i) the conversion of all Convertible Preferred
Stock and (ii) the exercise of outstanding warrants (which would otherwise
terminate upon the closing of the offering) into 168,952 shares of Common
Stock and (iii) the sale by the Company of the shares of Common
Stock offered hereby at an assumed initial public offering price of $
per share and the application of the estimated net proceeds therefrom.
Except as otherwise noted, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) reflects a one-for-
five reverse split of the Company's Common Stock effective upon the closing of
the offering, (iii) reflects the conversion of all outstanding shares of
Convertible Preferred Stock into an aggregate of 1,860,330 shares of Common
Stock; (iv) assumes the exercise of outstanding warrants (which would otherwise
terminate upon the closing of the offering) into 168,952 shares of Common
Stock; and (v) reflects an amendment to the Company's Certificate of
Incorporation, to be filed upon the closing of this offering, to remove the
Company's existing series of Convertible Preferred Stock and to create a class
of authorized but undesignated Preferred Stock. See "Capitalization,"
"Description of Capital Stock," "Underwriting" and Notes 7 and 8 to
Consolidated Financial Statements.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby.
Competition. The Company competes for enrollment as well as corporate
sponsorship in a market that is highly fragmented and competitive. In the
competition for enrollment, Bright Horizons 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. The
Company believes its ability to compete successfully depends on a number of
factors, including quality, locational convenience and price. The Company is
often at a price disadvantage with respect to family child care providers, who
operate with little or no rental expense and generally do not comply or are
not required to comply with the same health, safety, insurance and operational
regulations as the Company. Many of the Company's 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. 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 sponsorship, the Company competes with
residential center-based child care chains, some of which have divisions which
compete for corporate sponsorship opportunities and with other organizations
which focus exclusively on the work-site segment of the child care market.
Many of these competitors are able to offer child care at a lower price than
the Company by utilizing lower faculty-child ratios and/or offering their
staff lower compensation, enabling them to operate profitably with lower
levels of corporate sponsorship. Some of these competitors for corporate
sponsorship have greater penetration than the Company in certain geographic
regions and multiple relationships with corporate sponsors. Increased
competition for corporate sponsorships on a national or local basis could
result in increased pricing pressure and loss of market share, thereby
materially adversely affecting the Company's business, financial condition and
results of operations as well as its ability to attract and retain qualified
center directors and faculty and successfully pursue its growth strategy. See
"--Adverse Publicity," "Business--Competition" and "Business--Growth
Strategy."
Integration of GreenTree Acquisition; Additional Acquisitions. In December
1995, the Company acquired GreenTree Child Care Services, Inc., which operates
24 work-site child care centers. The Company had not previously made an
acquisition of similar size. There can be no assurance that GreenTree's
business can be successfully integrated into Bright Horizons or that Bright
Horizons' management will be successful in managing the combined operations.
The separate operating results of the Company and GreenTree and their pro
forma combined operating results may not be indicative of actual future
operating results of the combined entity. Also, there is a risk with the
GreenTree acquisition and any future acquisitions that customers of the
acquired company will not continue to do business with the Company following
the acquisition or that the Company will not be able to successfully implement
its business strategy and/or achieve adequate operating results at the
acquired centers. See "Unaudited Pro Forma Combined Financial Data,"
"Business--Growth Strategy," and the Company's Consolidated Financial
Statements and GreenTree's Financial Statements.
Risks Associated with Expansion. The Company intends to grow its business in
part by expanding into new geographic regions. When entering new markets, the
Company will be required to develop sponsor relationships, establish or
acquire suitable child care centers, hire personnel and establish marketing
programs, all of which may place substantial strain on the Company's financial
resources and management systems. To manage its expansion, the Company must
continuously evaluate the adequacy of its existing systems and procedures,
including, among others, its data processing, financial and internal
7
<PAGE>
control systems and management structure. There can be no assurance that
management will adequately anticipate all of the changing demands that growth
will impose on the Company's financial resources, systems, procedures and
structure. Any failure to adequately anticipate and respond to such changing
demands could have a material adverse effect on the quality of the Company's
services, its ability to attract and retain key personnel and its business,
financial condition and results of operations. See "Business--Growth
Strategy."
Risk of Limited Future Market Growth. Although the center-based segment of
the child care industry has gained significant market share during the past
two decades relative to other forms of child care, center-based child care
accounted for only 30% of the total market as of 1993. There can be no
assurance that demographic trends, including the increasing percentage of
mothers in the workforce, as well as trends in the preferences of working
parents and employers for center-based child care, will continue to lead to
increased market share for the center-based segment in general and the work-
site segment in particular. In addition, there can be no assurance that
employers will continue to view work-site child care as cost-effective or
beneficial to their workforces. Any change in current trends or preferences
could materially adversely affect the Company's business, financial condition
and results of operations and its ability to pursue its growth strategy. See
"Business--Marketing" and "Business--Growth Strategy."
Dependence on Relationships; Customer Concentration. A significant portion
of the Company's business is derived from corporate sponsors for whom it
provides work-site child care services pursuant to management contracts. While
the specific terms of such contracts vary, management contracts are generally
of short duration and, in some instances, are subject to early termination by
the corporate sponsor without cause. The Company also maintains relationships
with corporate sponsors for which it operates multiple work-site child care
centers. In addition, a significant percentage of the Company's corporate
sponsors are concentrated in the pharmaceutical industry, the entertainment
industry, hospitals and the federal government. The early termination or
nonrenewal of a significant number of corporate sponsorships, the termination
of any multiple-site sponsor relationship, or the downturn in economic
conditions in any sponsor industry would have a material adverse effect on the
Company's business, financial condition and operating results. See "--Adverse
Publicity" and "--Competition."
Adverse Publicity. The Company and certain other providers of child care
services have received negative publicity concerning alleged child abuse,
inadequate supervision and on-site accidents and injuries. Any such publicity,
whether or not directly relating to or involving the Company and irrespective
of veracity, could result in decreased enrollment at the Company's centers,
termination of existing sponsorship relationships, inability to attract new
sponsors or increased insurance costs, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence on Relationships; Customer Concentration" and
"--Insurance."
Litigation. Due to 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 children. In addition, claimants may seek
damages from the Company for child abuse, sexual abuse and other criminal acts
allegedly committed by Company employees. The Company has occasionally been
sued for claims relating to injuries to children in its care and has recently
been made a party to a claim regarding alleged sexual abuse by one of its
employees. There can be no assurance that additional suits 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, financial
position or results of operations, 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. See "--Insurance." See "Business--Legal Proceedings."
Seasonality and Quarterly Fluctuations. As is common in the child care
industry, the Company's revenues and results of operations fluctuate with the
seasonal demands for child care. The Company's
8
<PAGE>
revenues typically decline during the summer months due to decreased
enrollments in its centers as parents take family vacations and/or remove
their older children in preparation for grade school. 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 revenues. The Company's
quarterly results of operations may also fluctuate based upon the number and
timing of center openings and/or acquisitions, the length of time required for
new centers to achieve profitability, the performance of existing centers, the
timing and level of sponsorship payments, center closings, refurbishments or
relocations, the sponsorship model mix of new and existing centers,
competitive factors and general economic conditions. The Company's experience
has been that newly opened corporate sponsored centers can take up to one year
to achieve profitability. The inability of existing centers to maintain their
current profitability or the failure of newly opened centers to contribute to
profitability could result in additional fluctuations in the future operating
results of the Company on a quarterly or annual basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results and Seasonality."
Dependence on Key Management Personnel; Need to Hire Additional Qualified
Personnel. The Company's long-term success and its growth strategy depend on
its senior management, particularly Roger H. Brown, the Company's Chairman and
Chief Executive Officer, and Linda A. Mason, the Company's President. Mr.
Brown and Ms. Mason are husband and wife. The loss of service of one or more
of the Company's key senior management personnel could have an adverse effect
on the Company's business, financial condition and results of operations. The
Company's success and future growth will also depend on management's ability
to attract, hire, train and retain skilled personnel in all areas of its
business. If the Company is unable to successfully attract, hire, train and
retain such skilled personnel, the Company's business, financial condition and
results of operations could be adversely affected. See "Management--Directors
and Executive Officers."
Impact of Governmental Regulation. Child care centers are subject to
numerous state, federal 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 is 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, being placed on 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 the Company's centers into compliance. There can be no
assurance that governmental agencies will not impose additional restrictions
on the Company's operations which could adversely affect the Company's
business, financial condition and results of operations. In addition, under
the Internal Revenue Code, certain tax incentives are available to parents
utilizing child care programs. Any change in such incentives could cause a
number of parents to remove their children from the Company's centers, which
would adversely affect the Company's business, financial condition and results
of operations. Although none of the Company's employees are paid at the
minimum wage, the planned increase 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, financial condition and results
of operations. See "Business--Regulation."
Insurance. Recently, as a result of alleged incidents of child physical and
sexual abuse in the child care industry, 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), many operators of child care centers have had
difficulty obtaining adequate general liability insurance or child abuse
liability insurance or have been able to obtain such insurance only at
unacceptably high rates. The Company currently maintains the following types
of insurance policies: workers' compensation, commercial general liability,
automobile liability, commercial property liability,
9
<PAGE>
professional liability and excess "umbrella" liability. These policies provide
for a variety of coverages and are subject to various limitations, exclusions,
and deductibles. The commercial general liability policy provides for annual
coverage of $2.0 million per location and $1.0 million per occurrence,
although the policy limits coverage for child sexual abuse to an annual
aggregate of $1.0 million per site and per person. The Company's excess
"umbrella" coverage, relating to general liabilities other than those related
to child sexual abuse claims, provides coverage in the amount of $20.0 million
per year. There can be no assurance that such liability limitations will be
adequate, that insurance premiums for such coverages will not increase, or
that the Company will be able to obtain insurance at acceptable rates, if at
all. Any such inadequacy of or inability to obtain insurance coverage could
have a material adverse effect on the Company's business, financial condition
and results of operation. See "Business--Insurance" and "--Adverse Publicity."
General Economic Conditions. 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, in part, because of the tendency of out-of-work parents to
discontinue utilization of child care services. In addition, a significant
percentage of the Company's child care facilities 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. A general
economic downturn could cause corporate sponsors to eliminate or reduce the
level of child care services they provide to their employees. Any of the
foregoing events could have a material adverse effect on the Company's
business, financial condition and results of operations.
Substantial Control by Officers and Directors and their Affiliates. Upon
completion of the offering, the Company's executive officers and directors and
their affiliates will beneficially own or control approximately % ( % if the
Underwriters' over-allotment option is exercised in full) of the outstanding
shares of Common Stock, assuming exercise of vested options. Because of their
stock ownership, the Company's executive officers and directors and their
affiliates will be in a position to elect all of the Company's directors and
to control other actions requiring stockholder approval, including any merger,
consolidation or sale of all or substantially all of the Company's assets. See
"Principal and Selling Stockholders."
Potential Effect of Anti-Takeover Provisions. The Company's Amended and
Restated Certificate of Incorporation and Bylaws will, after the completion of
the offering, 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 will be subject to Section 203 of the
Delaware General Corporation Law ("DGCL") 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). The restrictions of Section
203 would not apply to those who were "interested stockholders" prior to the
consummation of the offering. This provision of the DGCL may have the effect
of deterring certain potential acquisitions of the Company. The Company's
Amended and Restated Certificate of Incorporation will provide for 3,000,000
authorized but unissued shares of Preferred Stock, the rights, preferences,
qualifications, limitations and restrictions of which may be fixed by the
Board of Directors without any further action by stockholders. See
"Description of Capital Stock."
No Prior Public Market; Determination of Public Offering Price; Possible
Volatility of Stock Price. Prior to the offering, there has been no public
market for the Common Stock, and there can be no assurance that an active
trading market will develop or be sustained, or that, if such market develops,
the market price will equal or exceed the public offering price set forth on
the cover of this Prospectus.
10
<PAGE>
The initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters
based on several factors, including prevailing market conditions and recent
operating results of the Company, and may not be indicative of the market
price of the Common Stock after the offering. The prices at which the Common
Stock will trade will be determined by the marketplace and may be influenced
by many factors, including the liquidity of the market for the Common Stock,
investor perception of the Company and of the child care industry generally,
and general economic and market conditions. In addition, the stock market
historically has experienced volatility which has affected the market price of
securities of many companies and which has sometimes been unrelated to the
operating performance of such companies. In addition, factors such as
announcements of new services or offices or acquisitions by the Company or its
competitors or third parties, as well as market conditions in the Company's
industry, may have a significant impact on the market price of the Common
Stock. The market price may also be affected by movements in prices of stocks
in general. See "Underwriting."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the
prevailing market price of the Common Stock. In addition to the shares of
Common Stock offered hereby, as of the date of this Prospectus (the "Effective
Date"), based upon shares outstanding as of November 30, 1996, there will be
shares of Common Stock outstanding, all of which are restricted shares
(the "Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). Approximately Restricted Shares will be eligible for
sale immediately following the Effective Date in reliance on Rule 144(k)
promulgated under the Securities Act. Beginning 90 days after the Effective
Date, approximately additional Restricted Shares will first become
eligible for sale in the public market pursuant to Rules 144 and 701
promulgated under the Securities Act, of which Restricted Shares are
subject to 180-day lock-up agreements with the Underwriters. Of the Restricted
Shares that will first become eligible for sale in the public market 180 days
after the Effective Date, approximately shares will be subject to certain
volume and other resale restrictions pursuant to Rule 144. In addition,
pursuant to a registration statement on Form S-8 which the Company intends to
file with the Securities and Exchange Commission 90 days following the
Effective Date, an aggregate of approximately and shares issuable
upon exercise of stock options (subject to the vesting provisions of the
options) will first become eligible for sale in the public market 90 days and
180 days following the Effective Date, respectively. Certain stockholders are
also entitled to registration rights. See "Principal and Selling Stockholders"
and "Shares Eligible for Future Sale."
Absence of Dividends. The Company has never paid any cash dividends on the
Common Stock and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
Dilution. Purchasers of the Common Stock offered hereby will suffer an
immediate and substantial dilution of $ per share in the net tangible book
value per share of the Common Stock from the initial public offering price.
See "Dilution."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering (at an assumed initial
public offering price of $ per share) are estimated to be $ million
after deducting estimated offering expenses payable by the Company and
underwriting discounts and commissions. The Company will not receive any
proceeds from the sale of shares of Common Stock by the Selling Stockholders.
The principal purposes of this offering are to increase the Company's equity
capital and to create a public market for the Company's Common Stock, which
will facilitate future access by the Company to the public financial markets
and help to attract and retain key employees. The Company intends to use
approximately $4.0 million of the net proceeds to repay indebtedness. The
Company intends to use the balance of the net proceeds for working capital and
general corporate purposes, including the development of new centers as well
as potential acquisitions. Although the Company regularly evaluates
acquisition opportunities, it is not a party to any letter of intent or other
agreement regarding any acquisition. Pending such uses, the Company intends to
invest the net proceeds of this offering primarily in investment grade,
interest-bearing securities.
The Company intends to repay unsecured indebtedness of approximately $3.0
million, plus accrued interest, to ServiceMaster incurred in connection with
the acquisition of GreenTree in December 1995, which indebtedness is required
to be repaid in the event of an initial public offering. This indebtedness
began accruing interest June 1, 1996 at a variable rate per annum equal to the
prime rate declared by First National Bank of Chicago. At November 30, 1996,
the interest rate on this indebtedness was 8.25%. The Company also intends to
repay approximately $1.0 million in mortgage debt outstanding as of November
30, 1996 under two mortgage notes consisting of $656,000 owed to Bank of
Boston Connecticut, which debt has a maturity date of December 1, 1999 and
bears interest at a variable rate per annum equal to the base rate plus 1.0%,
and $383,000 owed to SouthTrust Bank of West Florida, which debt has a
maturity of October 3, 2000 and bears interest at a fixed rate of 9.0% per
annum. At November 30, 1996, the interest rate on the mortgage note to Bank of
Boston Connecticut was 9.25%.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock
and does not intend to do so in the foreseeable future. The Company intends to
retain earnings to finance future operations and expansions. The Company is
prohibited by the terms of its revolving line of credit and its mortgage notes
from paying cash dividends without the prior written consent of the lending
institution.
12
<PAGE>
DILUTION
The Company's pro forma net tangible book value as of September 30, 1996 was
approximately $3.9 million or $1.64 per share. Pro forma net tangible book
value per share represents the Company's total tangible assets less total
liabilities, divided by the total number of shares of Common Stock
outstanding, assuming (i) the conversion of all outstanding shares of
Convertible Preferred Stock into 1,860,330 shares of Common Stock and (ii) the
exercise of outstanding warrants to purchase 168,952 shares of Common Stock.
After giving effect to the sale of the shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $ per
share and the receipt of the net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
approximately $ million or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to the
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ per share to purchasers of Common Stock in the offering. The
following table illustrates the dilution in pro forma net tangible book value
per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share as of September 30,
1996............................................................... $1.64
Increase per share attributable to new investors...................
Pro forma net tangible book value per share after the offering.......
---
Dilution per share to new investors.................................. $
</TABLE>
The following table sets forth, as of September 30, 1996, on a pro forma
basis after giving effect to the conversion of all outstanding shares of
Convertible Preferred Stock into 1,860,330 shares of Common Stock and the
exercise of outstanding warrants to purchase 168,952 shares of Common Stock
upon the closing of this offering, the number of shares purchased from the
Company, the total cash paid to the Company and the average price per share
paid by existing stockholders and to be paid by purchasers of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share (before deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
----------------- ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 2,360,869 % $19,118,342 % $8.10
New investors............... % %
--------- ---- ----------- --- -----
Total..................... % $ % $
========= ==== =========== === =====
</TABLE>
The above information assumes no exercise of (i) the Underwriters' over-
allotment option and (ii) except as noted above, stock options or warrants
after September 30, 1996. As of September 30, 1996, the Company has reserved
309,094 shares of Common Stock for issuance upon exercise of outstanding
options at a weighted average exercise price of $3.27 per share and the
warrant issued to ServiceMaster to purchase 40,000 shares at an exercise price
of $17.50 per share. To the extent any of such options and warrants are
exercised, there will be further dilution to new investors. See "Management--
Stock Plans."
13
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1996, (i) the actual
short-term debt and capitalization of the Company and (ii) the short-term debt
and capitalization of the Company as adjusted to reflect the conversion of all
outstanding shares of the Company's Convertible Preferred Stock into an
aggregate of 1,860,330 shares of Common Stock, the exercise of outstanding
warrants (which otherwise would terminate upon the closing of the offering)
into 168,952 shares of Common Stock, the issuance and sale by the Company of
the shares of Common Stock offered hereby (at an assumed initial public
offering price of $ per share) and the application of the net proceeds
therefrom. This table should be read in conjunction with the consolidated
financial statements, including the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Line of credit......................................... $ -- $ --
Current portion of long-term debt and capital leases... 480 89
-------- ----
Total short-term debt................................ $ 480 $ 89
======== ====
Long-term debt:
Note payable to ServiceMaster.......................... $ 2,625 --
Mortgage notes......................................... 1,527 501
Other long-term liabilities............................ 119 119
-------- ----
Total long-term debt................................. 4,271 620
Mandatory redeemable convertible preferred stock, $0.01
par value;
1,860,330 shares authorized, issued and outstanding,
actual;
no shares authorized, issued and outstanding, as
adjusted................................................ 18,881
Stockholders' equity (deficit):
Preferred Stock, $0.01 par value; 3,000,000 shares
authorized;
no shares issued and outstanding, actual and as
adjusted..............................................
Common Stock, $0.01 par value; 12,000,000 shares
authorized;
330,419 issued and outstanding, actual; shares
issued
and outstanding, as adjusted(1)....................... 3
Additional paid-in capital............................. 65
Accumulated deficit.................................... (11,435)
-------- ----
Total stockholders' equity (deficit)................ (11,367)
-------- ----
Total capitalization............................... $ 11,785 $
======== ====
</TABLE>
- --------
(1) Based upon the number of shares outstanding as of September 30, 1996.
Excludes (i) 309,094 shares of Common Stock reserved for issuance upon
exercise of options outstanding with a weighted average exercise price of
$3.27 per share (ii) 40,000 shares of Common Stock reserved for issuance
upon exercise of the warrant issued to ServiceMaster at an exercise price
of $17.50 per share, and (iii) 200,000 shares of Common Stock reserved for
future option grants under the Company's Equity Incentive Plan. See
"Management--Stock Plans."
14
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected consolidated financial and operating data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
included elsewhere in this Prospectus. The selected consolidated statement of
income data for each of fiscal years 1994, 1995 and 1996 have been derived from
the Company's Consolidated Financial Statements, which have been audited by
Price Waterhouse LLP, independent public accountants, and are included
elsewhere in this Prospectus. The selected consolidated balance sheet data at
the end of fiscal 1992, 1993 and 1994 and the selected consolidated statement
of income data for each of fiscal years 1992 and 1993 have been derived from
Consolidated Financial Statements, which have also been audited by Price
Waterhouse LLP, not included herein. The selected financial data as of and for
the three months ended September 30, 1995 and 1996 have been derived from the
unaudited financial statements appearing elsewhere in this prospectus. In the
opinion of the management of the Company, the unaudited financial statements
have been prepared on the same basis as the Company's audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the three months
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the entire fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996(1) 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $ 17,060 $ 23,812 $ 32,012 $ 43,693 $ 64,181 $11,932 $ 19,713
Cost of services....... 15,102 20,611 27,592 37,209 55,615 10,467 17,215
-------- -------- -------- -------- -------- -------- --------
Gross profit......... 1,958 3,201 4,420 6,484 8,566 1,465 2,498
Selling, general and
administrative
expenses.............. 2,905 3,034 3,578 5,174 6,376 1,259 2,049
Amortization of non-
compete
agreements(2)......... -- -- -- 80 1,680 87 140
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... (947) 167 842 1,230 510 119 309
Interest income
(expense), net........ 58 (14) (17) 21 (194) 16 (68)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........ (889) 153 825 1,251 316 135 241
Income tax benefit
(provision)(3)........ -- -- 319 382 1,005 430 (120)
-------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ (889) $ 153 $ 1,144 $ 1,633 $ 1,321 $ 565 $ 121
======== ======== ======== ======== ======== ======== ========
Net income per
share(4).............. $ 0.51 $ 0.05
======== ========
Weighted average
number of common and
common equivalent
shares(4)............. 2,597 2,592
======== ========
SELECTED OPERATING DATA:
Number of centers at
end of period......... 41 54 73 87 124 90 129
Licensed capacity at
end of period(5)...... 3,484 4,198 6,239 7,270 12,638 8,162 12,900
Average utilization
rate(6)............... 72.5% 76.4% 75.2% 75.7% 76.2% 69.5% 74.3%
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $ 1,204 $ 802 $ 545 $ 900 $ 954 $ 1,105 $ 852
Total assets........... 6,927 8,104 10,467 12,970 23,229 13,776 24,637
Long-term debt and
capital lease
obligations........... 767 718 12 749 4,248 749 4,271
Mandatorily redeemable
convertible preferred
stock................. 14,210 15,311 16,410 17,508 18,606 17,783 18,881
Total stockholders'
deficit............... $(11,086) $(12,031) $(11,983) $(11,447) $(11,215) $(11,156) $(11,367)
</TABLE>
- -------
(1) Effective December 1, 1995, the Company acquired the business and some of
the assets and liabilities of GreenTree. Fiscal 1996 results include seven
months of GreenTree operating results. If the GreenTree acquisition had
occurred on July 1, 1995, the Company's pro forma net revenues, gross
profit, net income and net income per share for fiscal 1996 would have been
$70.4 million, $8.8 million, $988,000 and $0.38, respectively. The pro
forma data do not purport to represent what the Company's results of
operations actually would have been had such transactions and events
occurred on the dates specified, or to project the Company's results of
operations for any future period or date. See "Unaudited Pro Forma Combined
Financial Data" on page F-26.
(2) In connection with the acquisitions of Burud and GreenTree, the Company
received agreements from the sellers not to compete with the Company for a
certain time period. Accordingly, the Company recorded intangible assets
for the non-compete agreements, which are being amortized over their
expected period of benefit. The Company anticipates recording amortization
expenses associated with these non-compete agreements of $560,000 and
$280,000 in fiscal 1997 and fiscal 1998, respectively.
(3) Reflects the benefit of net operating loss carryforwards in fiscal years
1994, 1995 and 1996, and in the three months ended September 30, 1995.
(4) Calculated on the basis described in Note 1 to Consolidated Financial
Statements. The earnings per share data, after giving effect to the number
of shares required to be issued in order to repay the debt and the
concomitant reduction in related interest expense (tax-effected), is the
same as the earnings per share data presented.
(5) Represents the total capacity permitted under applicable state licenses.
(6) Calculated as the total tuition revenue earned during the period divided by
the total potential tuition revenue, assuming 100% occupancy and full-time
tuition rates for each age group at each center.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Bright Horizons was founded in 1986 by current Chairman and Chief Executive
Officer Roger H. Brown and current President Linda A. Mason to provide
corporate-sponsored work-site child care and related services. Bright Horizons
operates the largest number of corporate-sponsored work-site child care
centers in the United States, with 130 work-site centers providing care to
more than 11,000 children. The Company believes that the corporate-sponsored
work-site child care model offers greater business opportunities than other
forms of center-based child care because (i) corporate sponsorship allows the
Company to concentrate its resources in those areas that directly translate
into high-quality child care and education while achieving favorable returns
on investment due to reduced start-up and/or operating costs, (ii) parents of
young children are offered greater convenience with respect to work and
commuting schedules, (iii) a corporate sponsor's selection of Bright Horizons
is perceived as an endorsement of the Company's capabilities in providing high
quality child care and enhances the Company's ability to market its services
directly to the sponsor's employees and (iv) large, multi-site corporate
sponsors prefer a child care provider with national scale and a track record
of serving similar companies.
The Company opened its first two centers in August 1987, grew to 41 centers
by June 30, 1992 and to 129 centers by September 30, 1996. The Company's
revenue growth has been primarily due to the addition of new centers as well
as increased enrollment at existing centers. Among the Company's corporate
sponsors are IBM (two centers), Motorola (four centers), Salomon Brothers,
Glaxo Wellcome (three centers), DuPont, Warner Bros., MCA/Universal, Mattel,
New York Hospital, Beth Israel Deaconess Medical Center and The George
Washington University. The Company seeks to cluster centers in geographic
areas to enhance operating efficiencies and create a leading regional
presence. The Company has expanded from its original cluster of centers in
Massachusetts to additional clusters in California, Illinois, Connecticut,
North Carolina, New York, Ohio, New Jersey and the District of Columbia.
Sponsorship Models. Although the specifics of the Company's corporate
sponsorship arrangements vary widely, there are two basic forms--the
corporate-sponsored model and the management contract model. Under the
corporate-sponsored model, Bright Horizons operates a child care center on the
premises of a corporate sponsor, giving priority enrollment to the children of
the corporate sponsor's employees. Bright Horizons maintains profit-and-loss
responsibility for the operation of the center, and, as part of the
arrangement, receives financial support from the corporate sponsor, which can
take various forms, including reduced occupancy costs, tuition assistance and
start-up and/or operating cost assistance. Newly-opened corporate-sponsored
centers generally operate at a loss until utilization levels of approximately
60% or more are achieved, which generally occurs by the end of the first year
of operations. When the Company takes over an existing corporate-sponsored
center operated by another provider, the Company also generally sustains
operating losses, though for a shorter period than with newly-opened centers.
Under the management contract model, Bright Horizons operates a work-site
child care center within an agreed upon budget, typically for a single
employer, and receives a management fee for its services. The sponsor is
typically responsible for all start-up costs and facility maintenance under
this model. Therefore, the Company does not sustain pre-opening or initial
operating losses under the management contract model. The management contract
model centers experience slightly lower operating margins than the corporate-
sponsored model at full maturity. At the end of fiscal years 1994, 1995 and
1996, the Company operated 61, 68 and 98 centers, respectively, under the
corporate sponsored model and 11, 19 and 26 centers, respectively, under the
management contract model.
Under the corporate-sponsored model, the Company's revenues consist
primarily of tuition paid by parents, supplemented in some cases by direct
payments from corporate sponsors and, to a far lesser extent, direct payment
from government agencies. Under the management contract model, in addition to
tuitions, revenues also include management fees and reimbursable net expenses.
In all cases, revenues are
16
<PAGE>
recognized as services are performed. Tuition payments are generally received
in advance and are payable by parents monthly, and in some cases, weekly.
Management fees payable by corporate sponsors are generally received monthly in
advance, while reimbursable expenses are received monthly in arrears.
Frequently, the Company maintains an advance from the corporate sponsor against
reimbursable expenses. Tuition, management fees and fees for reservation of
priority enrollment rights paid in advance are recorded as deferred revenue and
recognized in the appropriate period.
Center Economics. The Company's investment in a new corporate sponsored child
care center consists of pre-opening expenses, post-opening losses and capital
expenditures. The amount the Company is required to invest to open a new center
varies considerably, based primarily on the size of the center, the type of
sponsorship model under which the center will operate and the specific
contractual arrangements between the Company and the center sponsor. The
Company is generally not required to make a significant investment in centers
that operate under the management contract model. Since 1991, the Company's
average investment in corporate-sponsored centers that have been open at least
two full fiscal years (excluding centers acquired in the GreenTree acquisition)
was approximately $100,000, and those centers achieved an average operating
profit (before center level depreciation and any allocation of corporate
overhead and interest) of approximately $99,000 per center in their second full
fiscal year of operation.
Recent Acquisitions. The Company has made an acquisition in each of the two
most recent fiscal years, both of which were accounted for under the purchase
method. On November 1, 1994 the Company acquired all of the outstanding common
stock of Burud for a total consideration of $400,000, and paid each of the two
stockholders $300,000 in consideration of their agreement not to compete with
the Company for a period of two years following termination of employment. The
purchase of Burud added five centers, all located in California and operated by
Burud as management contract model centers. On December 1, 1995, the Company
acquired all of the outstanding common stock of GreenTree of Downers Grove,
Illinois, the operator of the GreenTree Child Care Centers. Total consideration
included $6.0 million in cash and a warrant to purchase 40,000 shares of Common
Stock at an exercise price of $17.50 per share. To finance the GreenTree
purchase, the Company borrowed $2.0 million under its bank line of credit and
$3.0 million from the seller. GreenTree's margins at mature centers are
generally lower than those of the Company's centers and, of the 24 GreenTree
centers acquired, seven had been open less than one year at the time of the
acquisition and consequently had not yet achieved targeted utilization levels.
Since their acquisition, GreenTree centers have experienced ongoing growth in
enrollment. The Company is in the process of reviewing GreenTree's operating
processes and policies and is implementing improvements to enhance
profitability. The Company expects that the planned improvements will, over
time, bring GreenTree's profit margins closer to those of its other centers.
Since their acquisition, the Company has fully integrated the GreenTree
centers into its financial systems and most of its operating procedures. The
Company is in the process of reviewing GreenTree's operating policies and
procedures and is implementing improvements, such as adjusting discount
policies and making limited personnel changes, which it believes will bring
GreenTree's profit margins closer to those of its other centers. To date, the
Company has not incurred significant costs in implementing such improvements.
Since their acquisition, the GreenTree centers have experienced ongoing growth
in enrollment, and the gross operating margin of the acquired centers has
improved from 7.1% for the eleven months preceding the acquisition on December
1, 1995 to 8.1% for the ten months following the acquisition.
Amortization of Non-Compete Agreements. In connection with the acquisition of
Burud and GreenTree, the Company received, in each case, an agreement from the
seller not to compete with the Company for a certain future period. The Company
recorded intangible assets for the non-compete agreements of $600,000 and $2.0
million, respectively. These amounts are being amortized over the estimated
period of benefit. The Company anticipates recording amortization expense
associated with the
17
<PAGE>
Burud and GreenTree non-compete agreements of $560,000 and $280,000 in fiscal
1997 and fiscal 1998, respectively.
The Company's provision for income taxes was a benefit of $1.0 million for
fiscal 1996 compared to a benefit of $382,000 for fiscal 1995, reflecting the
benefit of net operating loss carryforwards. As of June 30, 1996, the Company
had federal net operating loss carryforwards of approximately $3.4 million
which expire at various dates through 2007 and state net operating loss
carryforwards of approximately $1.4 million which expire at various dates
through 2005. See Note 10 to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of net revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, SEPTEMBER 30,
------------------- --------------
1994 1995 1996 1995 1996
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services.......................... 86.2 85.2 86.6 87.7 87.3
----- ----- ----- ------ ------
Gross profit............................ 13.8 14.8 13.4 12.3 12.7
Selling, general and administrative
expenses.................................. 11.2 11.8 10.0 10.6 10.4
Amortization of non-compete agreements.... 0.0 0.2 2.6 0.7 0.7
----- ----- ----- ------ ------
Income from operations.................. 2.6 2.8 0.8 1.0 1.6
Interest income (expense), net............ 0.0 0.0 (0.3) 0.1 (0.4)
----- ----- ----- ------ ------
Income before income taxes.............. 2.6 2.8 0.5 1.1 1.2
Income tax benefit (provision)............ 1.0 0.9 1.6 3.6 (0.6)
----- ----- ----- ------ ------
Net income.............................. 3.6% 3.7% 2.1% 4.7% 0.6%
===== ===== ===== ====== ======
Number of centers open at end of period. 72 87 124 90 129
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Net Revenues. Net revenues increased $7.8 million, or 65.2%, to $19.7
million for the three months ended September 30, 1996 from $11.9 million for
the three months ended September 30, 1995. Of the increase, $4.5 million is
attributable to the 24 GreenTree centers acquired in December 1995, for which
there was no comparable revenue in the first quarter of fiscal 1996. The
remainder of the increase is primarily attributable to the operation of the 13
centers opened in fiscal 1996, the addition of five centers during the three
months ended September 30, 1996 (three of which were corporate-sponsored and
two of which were management contracts), and an average tuition increase of
approximately 5%.
Gross Profit. Cost of services consists of center operating expenses,
including payroll and benefits for center personnel, facilities costs,
supplies and other expenses incurred at the center level. Gross profit
increased $1.0 million, or 70.5%, to $2.5 million for the three months ended
September 30, 1996 from $1.5 million for the three months ended September 30,
1995. As a percentage of net revenues, gross profit increased to 12.7% for the
three months ended September 30, 1996 compared to 12.3% for the three months
ended September 30, 1995. The Company achieved higher gross profit margins
from its existing base of centers for the three months ended September 30,
1996 than for the three months ended September 30, 1995, due in part to an
increase in the utilization rate for existing centers. Centers opened during
the three months ended September 30, 1996 also contributed more to that
quarter's gross profit than centers opened during the three months ended
September 30, 1995 contributed to that quarter's gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of regional and district management personnel,
home office management and corporate administrative
18
<PAGE>
functions, as well as marketing and development expenses for new and existing
centers. Selling, general and administrative expenses increased $790,000, or
62.7%, to $2.0 million for the three months ended September 30, 1996 from $1.3
million for the three months ended September 30, 1995. The increase in selling,
general and administrative expenses is due to the implementation of a regional
operating structure, as well as increases to administrative staff and the
opening of a new office in Chicago, Illinois in connection with the GreenTree
acquisition. As a percentage of net revenues, selling, general and
administrative expenses decreased to 10.4% for the three months ended September
30, 1996 from 10.6% for the three months ended September 30, 1995, due
primarily to the Company's ability to increase net revenues without a
commensurate increase in selling, general and administrative expenses.
Amortization of Non-Compete Agreements. Expenses associated with the
amortization of non-compete agreements increased $53,000, or 60.9%, to $140,000
for the three months ended September 30, 1996 from $87,000 for the three months
ended September 30, 1995. The increase is due to the recording of a $2.0
million intangible asset for non-compete agreements in connection with the
GreenTree acquisition in December 1995, for which there was no corresponding
expense in the three months ended September 30, 1995.
Income from Operations. Income from operations increased to $309,000 for the
three months ended September 30, 1996 from $119,000 for the three months ended
September 30, 1995. Excluding expenses related to amortization of non-compete
agreements, operating income would have increased $243,000, or 118%, to
$449,000 for the three months ended September 30, 1996 from $206,000 for the
three months ended September 30, 1995.
Interest Income (Expense), Net. Net interest expense increased $84,000 to
$68,000 for the three months ended September 30, 1996, from net interest income
of $16,000 for the three months ended September 30, 1995. The increase is due
to $3.0 million of debt incurred in connection with the GreenTree acquisition,
as well as $978,000 in mortgage loans, which were outstanding in the three
months ended September 30, 1996 but not in the three months ended September 30,
1995.
Income Taxes Benefit (Provision). The Company's effective income tax rate was
49.8% for the three months ended September 30, 1996 compared to a benefit of
$430,000 for the three months ended September 30, 1995. The income tax
provision in the three months ended September 30, 1996 reflects the impact of
higher state income taxes incurred by the GreenTree operations acquired in
December 1995, while the income tax benefit in the three months ended September
30, 1995 reflects the benefit of net operating loss carryforwards which became
available in that period.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Revenues. Net revenues increased $20.5 million, or 46.9%, to $64.2
million for fiscal 1996 from $43.7 million for fiscal 1995. Of the increase,
$10.2 million is attributable to 24 GreenTree centers acquired in December
1995, for which there was no comparable revenue amount in fiscal 1995. The
remainder of the increase is primarily attributable to a full period of
operations from the 14 centers opened in fiscal 1995, the addition of 13
centers by the Company in fiscal 1996 (seven of which were corporate-sponsored
and six of which were management contract centers) and an average tuition
increase of approximately 5%.
Gross Profit. Gross profit increased $2.1 million, or 32.1%, to $8.6 million
in fiscal 1996 from $6.5 million in fiscal 1995. As a percentage of net
revenues, gross profit declined to 13.4% in fiscal 1996 from 14.8% in fiscal
1995. The decrease is primarily attributable to the lower gross margins of the
acquired GreenTree centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 23.2%, to $6.4 million in
fiscal 1996 from $5.2 million in fiscal 1995, primarily to support the larger
number of centers. As a percentage of net revenues, selling, general and
19
<PAGE>
administrative expenses decreased to 10.0% in fiscal 1996 from 11.8% in fiscal
1995, due primarily to the Company's ability to increase net revenues without
a commensurate increase in selling, general and administrative expenses.
Amortization of Non-Compete Agreements. Expenses associated with the
amortization of non-compete agreements increased to $1.7 million in fiscal
1996 from $80,000 in fiscal 1995. This increase was due to the recording of a
$2.0 million intangible asset for non-compete agreements in connection with
the GreenTree acquisition in December 1995 and a full period of amortization
for the Burud non-compete agreements.
Income from Operations. Income from operations decreased to $510,000 in
fiscal 1996 from $1.2 million in fiscal 1995, due primarily to the increased
expenses associated with the amortization of non-compete agreements. Excluding
expenses related to amortization of non-compete agreements, income from
operations would have increased $880,000, or 67.2%, to $2.2 million in fiscal
1996 from $1.3 million in fiscal year 1995 and, as a percentage of net
revenues, would have increased to 3.4% in fiscal 1996 from 3.0% in fiscal
1995.
Interest Income (Expense), Net. The Company's net interest expense increased
$215,000 to $194,000 in fiscal 1996 from net interest income of $21,000 in
fiscal 1995, due to the $5.0 million of debt incurred in connection with the
GreenTree acquisition in December 1995 and the addition of $978,000 in
mortgage notes during fiscal 1996.
Income Tax Benefit (Provision). The Company's provision for income taxes was
a benefit of $1.0 million for fiscal 1996 compared to a benefit of $382,000
for fiscal 1995, reflecting the benefit of net operating loss carryforwards.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Revenues. Net revenues increased $11.7 million, or 36.5%, to $43.7
million for fiscal 1995 from $32.0 million for the year ended June 30, 1994.
This increase is primarily attributable to a full period of operations from
the 18 centers opened in fiscal 1994, the opening by the Company of ten new
centers in fiscal 1995 (seven of which were corporate-sponsored and three of
which were management contracts) the acquisition of five centers in the Burud
transaction on November 1, 1995 (all of which were management contract
centers) and an average tuition increase of approximately 5%.
Gross Profit. Gross profit increased $2.1 million, or 46.7%, to $6.5 million
in fiscal 1995 from $4.4 million in fiscal 1994. As a percentage of net
revenues, gross profit increased to 14.8% in fiscal 1995 from 13.8% in fiscal
1994. This increase was due to the addition of nine management contract
centers during fiscal 1995, which did not experience start-up losses, and a
reduction in start-up losses experienced by new corporate-sponsored centers
opened during the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 44.6%, to $5.2 million in
fiscal 1995 from $3.6 million in fiscal 1996. As a percentage of net revenues,
selling, general and administrative expenses increased to 11.8% in fiscal 1995
from 11.2% in fiscal 1994 due primarily to increased staffing levels required
to support a larger number of centers as well as marketing and development
personnel added with the acquisition of Burud in November 1995.
Amortization of Non-Compete Agreements. In connection with the acquisition
of Burud on November 1, 1994 the Company recorded an intangible asset for a
non-compete agreement of $600,000. The Company recorded amortization expense
of $80,000 in fiscal 1995, for which there was no comparable amount in fiscal
1994.
20
<PAGE>
Income from Operations. Income from operations increased $388,000, or 46.0%,
to $1.2 million in fiscal 1995 from $842,000 in fiscal 1994. If expenses
related to the amortization of non-compete agreements had not been recorded,
income from operations would have increased $468,000, or 55.5%, to $1.3
million in fiscal 1995 from $842,000 in fiscal 1994. As a percentage of net
revenue, operating income increased to 3.0% in fiscal 1995 from 2.6% in fiscal
1994, due primarily to the increase in gross profit.
Interest Income (Expense), Net. Net interest income for fiscal 1995
increased $38,000, to net interest income of $21,000 in fiscal 1995 from net
interest expense of $17,000 in fiscal 1994.
Income Tax Benefit (Provision). The Company's provision for the income taxes
was a benefit of $382,000 for fiscal 1995 compared to a benefit of $319,000
for fiscal 1994, reflecting the benefit of net operating loss carryforwards.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly results of
operations data of the Company for each of the four quarters in each of fiscal
1996 and fiscal 1995 and the three months ended September 30, 1996. The
Company believes that this information has been prepared on the same basis as
the audited Consolidated Financial Statements and that all necessary
adjustments, consisting only of the normal recurring adjustments, have been
included to present fairly the selected quarterly information when read in
conjunction with the audited Consolidated Financial Statements and the Notes
thereto included elsewhere in the Prospectus. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1996 1996 1996
--------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $11,932 $14,232 $18,271 $19,746 $19,713
Cost of services................ 10,467 12,254 15,946 16,948 17,215
------- ------- ------- ------- -------
Gross profit.................. 1,465 1,978 2,325 2,798 2,498
Selling, general and
administrative expenses......... 1,259 1,496 1,660 1,961 2,049
Amortization of non-compete
agreements...................... 87 277 658 658 140
------- ------- ------- ------- -------
Income from operations........ 119 205 7 179 309
Interest income (expense), net.. 16 (14) (48) (148) (68)
------- ------- ------- ------- -------
Income (loss) before income
taxes........................ 135 191 (41) 31 241
Income tax benefit (provision).. 430 604 (127) 98 (120)
------- ------- ------- ------- -------
Net income (loss)............. $ 565 $ 795 $ (168) $ 129 $ 121
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1994 1995 1995
--------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues.............................. $9,158 $10,816 $11,611 $12,108
Cost of services.......................... 7,977 9,280 9,788 10,164
------ ------- ------- -------
Gross profit............................ 1,181 1,536 1,823 1,944
Selling, general and administrative
expenses.................................. 988 1,163 1,259 1,764
Amortization of non-compete agreements.... -- 20 30 30
------ ------- ------- -------
Income from operations.................. 193 353 534 150
Interest income (expense), net............ 7 3 (6) 17
------ ------- ------- -------
Income before income taxes ............. 200 356 528 167
Income tax benefit........................ 61 108 161 52
------ ------- ------- -------
Net income.............................. $ 261 $ 464 $ 689 $ 219
====== ======= ======= =======
</TABLE>
21
<PAGE>
In the fourth quarter of fiscal 1996, the Company incurred approximately
$84,000 in selling, general and administrative expenses for administrative and
operating personnel including several Regional Vice Presidents and district
managers to support the growth in the number of centers. In the fourth quarter
of fiscal 1995, the Company incurred approximately $260,000 in selling,
general and administrative expenses primarily attributable to the write down
of the balance of goodwill and loss on disposal of other assets capitalized as
part of the acquisition of three centers in fiscal 1994. The impairment was
recognized during this period because one center had already been sold and a
second was in the process of being sold. In the same period, the Company also
recorded a $75,000 consulting fee.
The Company's business is subject to seasonal and quarterly fluctuations.
The Company's experience has been that the demand for child care services
decreases during the summer months. During this season, families are often on
vacation or often have alternative child care arrangements. In addition,
children who will begin primary school in the fall often leave the Company's
programs over the summer. Demand for the Company's services generally
increases in September upon the beginning of the new school year and remains
relatively stable throughout the rest of the year. The reduction in summer
enrollment generally results in lower revenue and gross profit in the first
quarter of the Company's fiscal year. During the summer, the Company reduces
staffing levels and offers summer programs to retain children and attract new
children. The Company's results of operations may fluctuate from quarter to
quarter as a result of, among other things, the performance of existing
centers, the number and timing of new center openings and/or acquisitions,
center closings and refurbishments, and the sponsorship model mix of new and
existing centers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are the ongoing operations of its
existing centers and the addition of new centers through development or
acquisition. The Company's primary source of liquidity has been cash flow from
operations, supplemented by borrowings under its revolving line of credit with
Fleet National Bank.
The Company has a $5.0 million revolving line of credit with Fleet National
Bank, $2.0 million of which may be used for working capital and general
corporate purposes and $3.0 million of which may be used for real estate loans
to be secured by mortgages. The revolving line of credit has a maturity date
of September 30, 1998 and bears interest at a variable rate per annum equal to
the bank's prime rate.
Cash provided from operations was $1.9 million in the three months ended
September 30, 1996, $4.9 million in fiscal 1996, and $1.5 million in fiscal
1995. Cash provided in the three months ended September 30, 1996 included
$121,000 of net income, $519,000 of depreciation and amortization (of which
$140,000 represented amortization of non-compete agreements) and a $1.7
million increase in accounts payable and accrued expenses, partially offset by
a $674,000 increase in prepaid expenses and other current assets. The fiscal
1996 amount included $1.3 million of net income, $2.8 million of depreciation
and amortization (of which $1.7 million represents amortization of non-compete
agreements arising from the Burud and GreenTree acquisitions) and $1.4 million
of increases in deferred revenue, partially offset by a $2.4 million increase
in deferred income taxes.
Cash used in investing activities was $676,000 during the three months ended
September 30, 1996, $4.8 million during fiscal 1996, and $2.0 million in
fiscal 1995. The cash used in the three months ended September 30, 1996 was
for the purchase of fixed assets, primarily to construct and equip new child
care centers. The fiscal 1996 amount included $3.1 million used in the
GreenTree acquisition and $1.7 million used to purchase fixed assets,
primarily for new child care centers.
Financing activities used $479,000 in the three months ended September 30,
1996, provided $363,000 in fiscal 1996 and used $87,000 in fiscal 1995. During
the three months ended September 30, 1996, the Company repaid $500,000 under
its bank line of credit. The fiscal 1996 amount consisted of amounts borrowed
to finance the GreenTree acquisition, including $2.0 million borrowed under
the Company's bank line of credit, offset by $1.6 million in principal
payments on outstanding debt, including the Company's bank line of credit.
22
<PAGE>
The Company makes capital expenditures primarily to build and equip new
child care centers or to refurbish existing centers. The Company is generally
not required to make capital expenditures for centers that operate under the
management contract model. In contrast, the Company may bear anything from all
to none of the capital expenditures for centers that operate under the
corporate-sponsored model depending on the nature of the subsidies provided by
the center sponsor. The sponsor generally will provide for the construction of
the center, and at times will pay for other real estate related costs such as
architectural and design fees and real estate broker fees, as well as capital
equipment and initial supplies. Capital expenditures in fiscal 1996 were $1.7
million compared with $1.9 million in fiscal 1995. Capital expenditures for
fiscal 1997 are expected to be at least $1.5 million. Any capital expenditures
which are either paid for directly or reimbursed by the corporate sponsor are
excluded from the accounts of the Company.
The Company intends to use a portion of the proceeds from its initial public
offering to repay the $3.0 million note, including accrued interest, payable
from the GreenTree acquisition as well as two mortgage notes of approximately
$1.0 million. The Company intends to invest the remainder of the net proceeds
in investment grade, interest-bearing securities or for other corporate
purposes.
The Company believes that the net proceeds of this offering, together with
cash provided by operating activities and the Company's line of credit will be
adequate to meet planned operating and capital expenditure needs, at least
through fiscal 1998. 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.
INFLATION
Certain of the Company's leases call for increases in rent and related
payments which correspond in part to changes in the Consumer Price Index.
However, the Company does not believe that inflation has had a material effect
on its results of operations. There can be no assurance, however, that the
Company's business will not be affected by inflation in the future.
23
<PAGE>
BUSINESS
OVERVIEW
Bright Horizons operates the largest number of corporate-sponsored work-site
child care centers in the United States, operating 130 work-site child care
centers providing care and education to more than 11,000 children. Demographic
changes, particularly the increasing percentage of mothers in the work force,
have driven significant growth in the market for child care services. A
growing number of corporations, hospitals, government agencies and
universities sponsor work-site child care centers in order to increase the
productivity, loyalty and commitment of their work forces, and to gain a
competitive advantage in recruiting and retaining talented employees.
Corporate sponsor support enables Bright Horizons to limit its start-up and
operating costs and concentrate its investment in those areas that directly
translate into high-quality child care, specifically faculty compensation,
teacher-child ratios, curricula, continuing faculty education, facilities and
equipment. The Company currently provides work-site child care services to
major corporate sponsors, including IBM (two centers), Motorola (four
centers), Salomon Brothers, Glaxo Wellcome (three centers), DuPont, Warner
Bros., MCA/Universal, Mattel and well-known institutions such as New York
Hospital, Beth Israel Deaconess Medical Center and The George Washington
University.
MARKET OVERVIEW
The market for child care services in the United States is large and
experiencing a shift toward center-based child care. According to industry
sources, approximately $27 billion was spent on child care services in 1994,
which includes nannies, relatives, family child care (services operated out of
a caregiver's home) and center-based child care (work-site and residential
child care centers, full and part-time nursery schools, and church-affiliated
and other not-for-profit providers). Although the number of births has
remained relatively constant since 1990, the child care market in the U.S. has
continued to grow steadily. This growth has been driven primarily by
demographic factors, particularly the growing percentage of mothers in the
work force. Today, over 60% of mothers with children under six are in the work
force, compared to 22% in 1960. Among college-educated women, 70% of mothers
with children under one are in the work force. The market for child care
services remains highly fragmented, with national child care providers holding
less than 5% of the industry's licensed capacity and the 50 largest providers
accounting for less than 10% of licensed capacity. The Company believes there
are less than 10 work-site center-based child care companies providing
services on a national basis.
[CHART APPEARS HERE]
Child Care Arrangements for Preschoolers of Employed Mothers
1977 1985 1988 1990 1993
---- ---- ---- ---- ----
Other 1% 1% 1% 1% 1%
Nannies 7% 6% 5% 5% 5%
Relatives (In/Out Home) 57% 48% 44% 46% 47%
Family Child Care 22% 22% 24% 20% 17%
Center-Based Care 13% 23% 26% 28% 30%
24
<PAGE>
Center-based child care has gained significant market share in the overall
child care market. While non-center based care accounted for roughly 70% of
the child care market as of 1993, between 1977 and 1993, the percentage of
children under six in child care attending center-based child care increased
from 13% to 30%. Center-based child care is more reliable than traditional
forms of child care such as relatives, nannies and family child care
providers, with whom parents may experience periodic, unpredictable
interruptions of care due to illness, vacation or change in employment.
Center-based providers are often able to provide a higher quality of child
care due to a more age-appropriate curriculum, better facilities, greater
opportunity for social interaction among children and adherence to state
licensing standards that are generally more stringent than those that apply to
family child care providers. Industry surveys indicate that the preference for
center-based child care increases with the education level of the parents.
According to a 1993 Department of Education study, over 80% of the children
who have attended some form of center-based child care were children of
college graduates.
Corporate-sponsored work-site child care, which emerged in the 1980s, offers
distinct advantages to parents over other forms of center-based child care.
Parents value the higher quality care and education made possible by corporate
support. The 1995 Cost, Quality, and Child Outcomes in Child Care Centers
Study illustrated the strong correlation between outside funding, such as
corporate support, and the provision of high-quality child care. Parents are
able to monitor quality on a daily basis and participate in their child's
ongoing care and education by taking advantage of the Company's "open door"
policy to visit the center during the work day. Work-site centers are also
convenient to parents in terms of location and hours of operation. Mothers
have the opportunity to nurse their infants during the work day and are nearby
in case of illness or emergency.
Many corporations and other employers believe that work-site child care
enhances employee productivity, loyalty and commitment. For these reasons,
corporations have increasingly recognized child care benefits as a key element
of their employee recruitment and retention strategy, and over 85% of large
employers currently provide some form of child care assistance to their
employees, as compared to 64% in 1990. Employers are increasingly providing
this benefit through work-site child care centers, with 10% of large companies
providing work-site child care in 1995, compared to 6% in 1990. A wide variety
of employers currently sponsor work-site child care centers, including
corporations, hospitals, government agencies and universities. The Company has
found that the decision by an industry leader to sponsor a work-site child
care center often exerts competitive pressure on other industry participants
to follow suit.
BUSINESS STRATEGY
Corporate Sponsorship. Corporate sponsorship enables Bright Horizons to
address simultaneously the three most important criteria used by parents to
evaluate and select a child care provider: quality of care, convenience and
cost. By reducing the Company's start-up and operating costs, corporate
sponsorship enables Bright Horizons to concentrate its investment in those
areas that directly translate into high-quality child care, including faculty
compensation, teacher-child ratios, curricula, continuing faculty education,
facilities and equipment. The Company's 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 corporate sponsor. Work-site child care allows parents to
spend more time with their children, both while commuting and during the work
day, and to participate in and monitor their child's ongoing care and
education. Finally, because corporate support generally defrays a portion of
the Company's start-up and/or operating costs, Bright Horizons is able to
offer its customers high-quality child care at competitive tuition levels.
Some corporations offer subsidized tuition to their employees as part of their
overall child care benefits package.
Quality Leadership. The critical elements of the Company's quality
leadership focus include:
. NAEYC Accreditation. Bright Horizons operates its centers to qualify for
accreditation by the National Association for the Education of Young
Children ("NAEYC"), a national organization
25
<PAGE>
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 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, physical
environment, and health and safety. NAEYC criteria generally are more
stringent than state regulatory requirements. The majority of center-
based child care providers are not NAEYC-accredited, and the Company has
more NAEYC-accredited work-site child care centers than any other work-
site provider.
. High Faculty-Child Ratios. High faculty-child ratios are a critical factor
in providing quality group child care, facilitating more focused care and
enabling teachers to forge relationships with children and their parents.
Under Bright Horizons' 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, tailoring programs to
meet the child's individual needs, while engaging parents in establishing
and achieving goals. The Company is committed to maintaining the NAEYC-
recommended faculty-child ratios for all age groups. Many Bright Horizons
centers exceed the NAEYC recommended minimum ratios. By contrast, most
center-based child care providers conform only to the minimum staff-child
ratios mandated by applicable governmental regulations, which are
generally less intensive than NAEYC standards and vary widely from state
to state.
. Above-Average Faculty Compensation. The Company believes that its above-
average compensation, comprehensive and affordable benefits package and
opportunities for internal career advancement enable Bright Horizons to
attract highly qualified, well-educated, experienced and committed center
directors and faculty. Based on data provided by the 1995 Cost, Quality
and Child Outcomes in Child Care Centers Study, Bright Horizons' average
center director and faculty compensation is more than 30% and 10%,
respectively, above the for-profit industry average. The Company believes
that its benefits package, which includes medical, dental and disability
insurance, paid vacation and sick leave, a 401(k) savings plan, incentive
stock options, tuition reimbursement and child care discounts, is
unusually comprehensive and affordable by industry standards. These
benefits are an important recruitment and retention tool for the Company
in the relatively low-paying child care industry.
. Highly Qualified Center Directors and Faculty. Bright Horizons believes
its faculty's education and experience are exceptional when compared to
traditional center-based child care chains. The typical Bright Horizons
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 considers ongoing
training essential to maintaining high quality service, centers have
training budgets for their faculty that provide for in-center training,
attendance at selected outside conferences and seminars and partial
tuition reimbursement for continuing education.
. Innovative Curricula. Bright Horizons' innovative, age-appropriate
curricula distinguish it in an industry typically lacking educational
programs. The Company is committed to improving upon the typical child
care experience by creating a dynamic and interactive environment that
stimulates learning and development. As part of its comprehensive
curricula, the Company has developed the proprietary Language Works!
preschool curriculum which facilitates mastery of language by early
exposure to words and symbols, extensive use of language in all activity
areas, composition of books and immersion in literature. The Company
seeks to involve parents in the center's activities and supports the
extension of learning into the home. Bright Horizons is currently advised
by several education experts, including Dr. T. Berry Brazelton, Dr. Ed
Zigler and Dr. Sharon Lynn Kagan of its Advisory Board and Dr. Sara
Lawrence-Lightfoot of its Board of Directors.
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<PAGE>
. Attractive, Child-Friendly Facilities. The Company believes that
attractive, spacious, child-friendly facilities are an important element
in fostering high-quality learning environments for children. The
Company's centers are custom-built and 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 with age-appropriate materials
and design, family hospitality areas and computer centers.
Regional Clustering. The Company's strategy is to cluster its centers in
geographic regions. Regional clustering permits the Company to strengthen
quality, develop local recruiting networks, leverage its local reputation,
increase market penetration and efficiently allocate its faculty among nearby
centers in cases of illness, vacation or leave. Clustering also provides the
Company 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. The Company currently has clusters of work-site
child care centers in Massachusetts, California, Illinois, Connecticut, North
Carolina, New York, Ohio, New Jersey and the District of Columbia.
GROWTH STRATEGY
The key elements of the Company's growth strategy are as follows:
Open Centers for New Corporate Sponsors. Bright Horizons' senior management,
as well as the Company's regional and home office sales force, actively pursue
potential new corporate sponsors, particularly in industries that provide
work-site child care services as a standard benefit. The Company 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 services, sponsors regularly contact
Bright Horizons requesting proposals for operating a child care center. See
"Risk Factors--Risk of Limited Future Market Growth" and "--Competition."
Expand Relationships with Existing Corporate Sponsors. Bright Horizons 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. The Company's experience
has been that corporate sponsors are more inclined to employ Bright Horizons
on a multi-site basis following the successful operation of an initial center.
The Company currently operates child care centers at multiple sites for 10
sponsors, including Glaxo Wellcome, IBM, Motorola, Prudential Real Estate and
Warner Bros., which collectively accounted for more than 25% of the Company's
revenues in fiscal 1996.
Assume Management of Existing Child Care Centers. Assuming the management of
existing centers enables Bright Horizons 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 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. The Company assumed the management of 18 centers from
employers and other child care providers over the last three fiscal years.
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<PAGE>
Explore Strategic Acquisitions. Bright Horizons seeks to acquire existing
work-site child care centers and local and 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 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. In December 1995, the Company
purchased from ServiceMaster 24 centers operating under the GreenTree name. In
November 1994, the Company acquired Burud, which managed five work-site child
care centers in California.
Develop and Market Additional Services. The Company plans to continue to
develop and market additional child care and educational services, including
back-up work-site child care (serving parents when their primary child care
options are unavailable), seasonal services (extending hours at existing
centers to serve sponsors with highly seasonal work schedules), school
vacation clubs, summer programs, kindergarten and first grade programs, before
and after school programs, and to add residential child care centers in areas
where tuition levels can support Bright Horizons' quality standards.
The Company anticipates adding 20 to 25 new centers in calendar 1997.
SPONSORSHIP MODELS
Although the specifics of the Company's corporate sponsorship arrangements
vary widely, they generally can be classified into two forms: (i) the
corporate-sponsored model, where Bright Horizons operates a child care center
on the premises of a corporate sponsor, gives priority enrollment to 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 contract model, where Bright Horizons
manages a work-site child care center for a management fee, typically for a
single employer within an agreed upon budget.
The Corporate-Sponsored Model. Corporate-sponsored model centers currently
represent approximately 80% of Bright Horizons' child care centers. Bright
Horizons typically designs and operates a work-site child care center in
exchange for some form of financial or operating support from the corporate
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. The Company maintains profit-and-loss responsibility
for corporate-model child care centers. The corporate model can be classified
into two subcategories: (i) employer-sponsored, where Bright Horizons provides
child care on a priority enrollment basis for employees of a single employer
sponsor, and (ii) developer-sponsored, where Bright Horizons provides priority
child care to the employees of multiple employers located within a 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 Bright Horizons to provide child care 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 and enrollment guarantees. Children of the sponsors' employees
typically are granted priority enrollment at the center. Operating
contracts under the employer-sponsored model have terms that generally
range from three to ten years, require ongoing reporting and, in some
cases, limit annual tuition increases.
The Developer-Sponsored Model. A developer-sponsored child care 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 the Company at a discounted rent, Bright
Horizons offers priority enrollment to the children
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<PAGE>
of the site's employees. Bright Horizons typically negotiates lease terms
of ten to 25 years, including the initial term and renewal options. Under
the developer-sponsored model, Bright Horizons' typically operates its
child care centers with few ongoing operating restrictions or reporting
requirements.
The Management Contract Model. Management contract centers currently
represent approximately 20% of Bright Horizons' child care centers. Under the
management contract model, Bright Horizons receives a management fee and is
reimbursed 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 contract model enables the corporate
sponsor to have the greatest degree of control with respect to budgeting,
spending and operations. Management contracts require Bright Horizons 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 regional clustering, the Company is
organized into four operational regions--the Northeast, Southeast, Midwest and
West. Each region is managed by a Regional Vice President and is divided into
three to six districts, each headed by a District Manager responsible for
supervising the quality and operating performance of six to ten centers. A
typical center is managed by a director with a staff ranging from 20 to 25
faculty and administrative personnel. 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. The Company's home office handles most finance, human resources,
administration, business development and marketing functions.
Center hours of operation are designed to match the schedules of the
employer or developer sponsor. Most centers are open ten to twelve hours a
day, Monday through Friday. Typical hours of operation are from 7:00 a.m. to
6:00 p.m. The Company offers a variety of enrollment options, ranging from
full time (40-50 hours per week) to part-time options. Over 60% of children
who attend the Company's centers are enrolled on a full-time basis. The
majority of children enrolled in the Company's child care centers are those of
the employer-sponsor or those of employees of the developer-sponsor's tenants.
The remaining enrolled children come from the general public.
Monthly tuition depends upon the age of the child, geographic location and
the extent to which tuition is subsidized by a corporate sponsor. In fiscal
1996, average full-time monthly tuition was $820 for infants, $670 for
toddlers and $610 for preschoolers. Tuition at most of the Company's centers
is payable in advance and is due monthly. In some cases, parents can pay
tuition through payroll deduction.
Facilities. The Company's child care 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 Bright
Horizons center is approximately 7,000 to 8,000 square feet, and has a
capacity for 16 infants, 40 toddlers and 60 preschoolers. There are typically
two infant rooms, four toddler rooms and three preschool rooms. As of the end
of fiscal 1996, the Company's centers had a total licensed capacity of
approximately 12,600 children, with the smallest having a capacity of 31
children and the largest having a capacity of over 250 children.
The Company believes that attractive, spacious, child-friendly facilities
are an important element in fostering a high-quality learning environment for
children. Bright Horizons 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
which require hot meals to be prepared on site.
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<PAGE>
Health and Safety. The safety and well-being of the children in its care is
a high priority for Bright Horizons. The Company employs a variety of security
measures at its centers, which may include electronic access systems, security
guards, or other site-specific procedures. In addition, the Company's 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.
The Company conducts ongoing training of personnel in the areas of health,
safety and emergency protocol. The Company requires CPR and first aid
certification of center management personnel, and offers such certification to
all center personnel. The Company conforms to federal OSHA requirements with
respect to annual blood-born pathogen training of all center personnel.
CURRICULA
The Company's dynamic and interactive age-appropriate curricula focus on
hands-on learning activities for children. Early childhood experts and
educators believe that children learn best through exploration and play-
oriented learning. Children grow and acquire skills at their own pace, taking
advantage of age-appropriate activities to challenge themselves, build
feelings of success, develop school competence and reach higher levels of
learning. Bright Horizons programs are built on this developmental approach
and the belief that learning is fun. Programs vary but typically share the
following characteristics: consistent responsiveness to children's needs; a
balance of structure and flexibility in daily schedules to accommodate
individual interests; connection of routine, daily tasks such as eating or
dressing to opportunities for social interaction and learning; respect for and
celebration of cultural diversity; and encouragement of parental
participation. In addition, Bright Horizons' educational programs feature
!Language Works!, a learning process that helps children learn about language
in ways that are meaningful to them, experiencing language as part of every
curriculum activity throughout the day.
The teacher's role in the Bright Horizons classroom is to plan and prepare a
rich environment in which children are stimulated to learn, to provide a
variety of activity choices and to facilitate the child's hands-on engagement
in chosen activities. A Bright Horizons teacher strives to supplement the
primary role of parents in providing care, and faculty encourage parents to
become involved in the center's activities and support the extension of
learning into the home.
MARKETING
Bright Horizons markets its services to two constituencies: corporate
sponsors and parents. Bright Horizons' senior management, as well as the
Company's regional and home office sales force, maintains relationships with
larger customers and actively pursues potential new corporate sponsors,
particularly in industries that provide work-site child care services as a
standard benefit in order to recruit and retain talented employees. The
Company's sales force is organized on a regional basis and is responsible for
identifying potential corporate sponsors and managing the overall sales
process, which generally ranges from three to nine months from initial contact
to execution of the sponsorship agreement. As a result of the Company's
national visibility as a high-quality child care provider, potential sponsors
regularly contact Bright Horizons requesting proposals. The Company competes
for most employer sponsorship opportunities via a request for proposal
process.
At the center level, directors are responsible for marketing to parents. The
Company seeks to develop a local reputation by promoting its high quality
staff, facilities, programs and interactive, hands-on curricula. The Company's
pre-opening and ongoing local marketing efforts include open houses, local
direct mail, 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 child care 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 the Company 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.
Bright Horizons has found that the parents it serves generally are well
compensated, highly educated and willing to bear the cost of high-quality
child care. The Company's 1995 and 1996 parental surveys found that 73% of the
mothers who use Bright Horizons' services hold bachelor degrees and 86% work
more than 31 hours per week. The same surveys indicate that approximately 70%
of the parents who use Bright Horizons child care centers are engaged in
professional or managerial occupations and average annual household income
exceeds $90,000. The Company is also able to serve a broad range of parents
due to corporate sponsor support, which reduces tuition costs and sometimes
takes the form of partial tuition subsidies to lower-income families.
COMPETITION
The market for child care services is highly fragmented and competitive. The
Company experiences competition for enrollment and for corporate sponsorship.
The Company believes that the key factors in the competition for enrollment
are quality of service, locational convenience and cost. Bright Horizons
competes for enrollment with nannies, relatives, family child care and center-
based child care providers. Corporate sponsor support enables Bright Horizons
to limit its start-up and operating costs and concentrate its investment in
those areas that directly translate into high-quality child care, 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 the
Company 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, the Company 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.
See "Risk Factors--Competition."
The Company believes its ability to compete successfully for corporate
sponsorship depends on a number of factors, including reputation, quality of
service, cost, the ability to customize sponsorship arrangements and national
scale. 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. Although the Company believes there are less than 10 companies
that currently operate work-site child care centers on a national basis, its
primary competitor is CorporateFamily Solutions. The Company believes it is
well-positioned to attract corporate sponsors who wish to outsource the
management of new or existing work-site child care 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. The Company believes that its commitment to NAEYC
accreditation is an advantage in the competition for corporate sponsorship
opportunities. See "Risk Factors--Competition."
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<PAGE>
PROPERTIES
The following table summarizes the locations of the Company's centers by
state as of November 30, 1996:
<TABLE>
<CAPTION>
LOCATION NUMBER LOCATION NUMBER
-------- ------ -------- ------
<S> <C> <C> <C> <C>
California..................... 19 New Hampshire.................. 1
Connecticut.................... 10 New Jersey..................... 3
Delaware....................... 2 New Mexico..................... 1
District of Columbia........... 4 New York....................... 8
Florida........................ 3 North Carolina................. 14
Georgia........................ 1 Ohio........................... 4
Illinois....................... 17 Rhode Island................... 1
Iowa........................... 4 South Carolina................. 1
Maine.......................... 1 Tennessee...................... 1
Maryland....................... 2 Texas.......................... 2
Massachusetts.................. 25 Wisconsin...................... 2
Missouri....................... 3
</TABLE>
As of November 30, 1996, the Company operated 129 centers in 22 states and
the District of Columbia, of which 51 were leased, three were owned and 75
were operated under operating agreements. 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.
Although the Company's corporate sponsorship arrangements vary widely, they
generally are classified as either a corporate model or management contract
model. See "Business--Sponsorship Models." Approximately 80% of the Company's
child care centers are operated under the corporate sponsorship model and have
leases and/or operating arrangements with terms expiring as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NUMBER EXPIRING
----------- ---------------
<S> <C>
1997......................................................... 9
1998......................................................... 9
1999......................................................... 14
2000 and later............................................... 67
</TABLE>
The remaining approximately 20% of the Company's child care centers are
operated under the management contract model. Although management contract
arrangements are generally of short duration and, in some instances, subject
to early termination by the corporate sponsor without cause, the Company's
experience has been that every management contract center that has come up for
renewal has been renewed, except for two centers which sponsors decided to
close.
The Company also leases approximately 7,700 square feet for its home office
in Cambridge, Massachusetts under an operating lease that expires August 31,
1999. The Company's three owned centers in Tampa, Florida; Glastonbury,
Connecticut; and Quincy, Massachusetts are subject to mortgages of $400,000,
$700,000 and $528,000, respectively.
EMPLOYEES
As of November 30, 1996, the Company employed approximately 3,700 employees
(including part-time and substitute teachers), of whom 71 were employed at
Bright Horizons home and regional offices, 21 were employed as district or
regional managers and the remainder were employed at the Company's child care
centers. Center employees include faculty and administrative personnel. The
Company does not have an agreement with any labor union and believes that its
relations with its employees are good. All of the Company's personnel are paid
above the Federal minimum wage.
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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 staff to children, staff training, record keeping, the dietary
program, the daily curriculum and compliance with health and safety standards.
In most jurisdictions, these agencies conduct scheduled and unscheduled
inspections of centers, and licenses must be renewed periodically. In most
jurisdictions, regulations have been enacted which establish requirements for
employee background checks or other clearance procedures for employees of
child care centers. Center directors and district 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. The Company 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
the Company to comply with ADA have not been significant. Management believes
the Company is in substantial compliance with all material regulations
applicable to its business. See "Risk Factors--Regulation."
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 the Company
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
The Company currently maintains the following types of insurance policies:
workers' compensation, commercial general liability, automobile liability,
commercial property liability, professional liability and excess "umbrella"
liability. The policies provide for a variety of coverages, are subject to
various limitations and exclusions, and deductibles. The commercial general
liability policy provides for annual coverage of $2.0 million per location and
$1.0 million per occurrence, although the policy specifically limits coverage
for child sexual abuse to an annual aggregate limit of $1.0 million per site
and per person. The Company's excess "umbrella" coverage, relating to general
liabilities other than those related to child sexual abuse claims, includes
coverage in the amount of $20.0 million per year. Management believes that the
Company's current insurance coverages are adequate to meet its needs. See
"Risk Factors--Litigation."
The Company 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. See "Risk Factors--Adverse Publicity."
THE HORIZONS INITIATIVE
To complement its mission to improve the care and development of young
children, in 1988, the Company founded The Horizons Initiative, a non-profit
organization that develops and implements programs to enrich the lives of
homeless children in the Greater Boston area. In 1994, The Horizons Initiative
opened the Community Children's Center, the first child care center in Boston
specifically for homeless children. The Horizons Initiative is an independent
entity, and while the Company provided some start-up resources, such as office
space and administrative support, The Horizons Initiative is now entirely
supported by charitable gifts and public funding.
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<PAGE>
LEGAL PROCEEDINGS
The Company has been and is from time to time subject to claims and suits
incidental to the conduct of its business. There can be no assurance that the
Company's insurance will be adequate to cover all liabilities that may arise
out of such claims. Although the Company intends to defend itself vigorously
against all such claims, the ultimate outcome of the claims cannot be
accurately predicted. A complaint has recently been filed in the Massachusetts
Superior Court for Middlesex County against Bright Horizons and one of its
employees seeking monetary damages for harms related to alleged sexual abuse
by the employee. This case, insofar as it pertains to claims against Bright
Horizons, has been referred to, and is currently being defended by, Bright
Horizons' insurance company. The Company does not believe that this or any
other claim of which it is currently aware will have a material adverse effect
to its business, financial condition or results of operation. See "Risk
Factors--Litigation."
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Roger H. Brown............. 40 Chairman of the Board of Directors and Chief
Executive Officer
Linda A. Mason............. 41 President and Director
Stephen I. Dreier.......... 54 Chief Financial Officer, Secretary and Treasurer
Mary Ann Tocio............. 48 Chief Operating Officer
Joshua Bekenstein(1)....... 39 Director
Robert S. Benson........... 54 Director
John M. Reynolds(2)........ 47 Director
Sara Lawrence-Lightfoot.... 52 Director
Ernest C. Parizeau(1)(2)... 39 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Brown co-founded the Company and has served as Chairman and Chief
Executive Officer of the Company since its inception in 1986. Prior to joining
the Company, Mr. Brown acted as co-director of the Save the Children relief
and development effort in Sudan and worked as a program officer with CARE and
UNICEF. Prior to 1986 he also worked as a management consultant for Bain &
Company, Inc. Mr. Brown currently serves as a director on the Governing Board
of the National Association for the Education of Young Children and as a
director of the Child Care Action Campaign, a not-for-profit organization
which promotes quality child care, and The Horizons Initiative, an
organization that provides support for homeless children and their families.
Mr. Brown is a graduate of the Yale School of Management. Mr. Brown is the
husband of Linda A. Mason.
Ms. Mason co-founded the Company and has served as President of the Company
since its inception in 1986. From its inception until September 1994, Ms.
Mason also acted as the Company's Treasurer. Prior to joining the Company, Ms.
Mason was co-director of the Save the Children relief and development effort
in Sudan and worked as a program officer with CARE. Prior to 1986, Ms. Mason
worked as a management consultant with Booz, Allen and Hamilton and
Agribusiness Associates. In addition to serving as director of the Company,
Ms. Mason also is a director of Whole Foods Market, Inc., which owns and
operates retail food stores, and The Horizons Initiative. Ms. Mason is a
graduate of the Yale School of Management. Ms. Mason is the wife of Roger H.
Brown.
Mr. Dreier joined the Company as Vice President and Chief Financial Officer
in 1988 and became its Secretary in November 1988 and Treasurer in September
1994. 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. Mr. Dreier is a graduate of the
Massachusetts Institute of Technology Sloan School of Management.
Ms. Tocio joined the Company in 1992 as Vice President and General Manager
of Child Care Operations. She was appointed Chief Operating Officer in
November, 1993. From 1983 to 1992, Ms. Tocio held several positions with
Wellesley Medical Management, Inc., including Senior Vice President of
Operations, where she managed more than 100 ambulatory care centers
nationwide. Prior to that time, Ms. Tocio held various management positions
with several Boston-area hospitals. Ms. Tocio is a graduate of the Simmons
College Graduate School of Management.
35
<PAGE>
Mr. Bekenstein has been a director of the Company since 1987. Since 1993,
Mr. Bekenstein has been a Managing Director of Bain Capital, Inc. and has been
a general partner of Bain Venture Capital since its inception in 1987. Mr.
Bekenstein also serves as a director of Waters Corporation, a manufacturer and
distributor of high performance liquid chromatography instruments, and The
Horizons Initiative.
Mr. Benson has been a director of the Company since 1990. Since April 1996,
Mr. Benson has been President of Professional Assist Corporation, a privately-
held membership association company. From 1987 to 1994, Mr. Benson served as
president of VICORP Restaurants, Inc., an owner and operator of restaurants.
From 1975 to 1987, Mr. Benson was President of Children's World, Inc., the
third largest child care provider in the United States. Mr. Benson also has
been a general partner of Boettcher Venture Capital Partners since 1985.
Mr. Reynolds has been a director of the Company since its founding in 1987.
Since 1995, Mr. Reynolds has been a consultant with Cambridge Associates,
Inc., a firm providing investment and financial consulting services. From 1986
through 1995, Mr. Reynolds served in several executive positions with North
American Management Corp., a private multi-family investment management group.
Dr. Lawrence-Lightfoot has been a director of the Company since 1993. Since
1980, Dr. Lawrence-Lightfoot has been a professor of education at Harvard
University. In addition to serving as a director of the Company, Dr. Lawrence-
Lightfoot is also a director of the Boston Globe Company. Dr. Lawrence-
Lightfoot has received honorary degrees from 12 universities and colleges
including Bank Street College and Wheelock College, two of the nation's
foremost schools of early childhood education.
Mr. Parizeau has been a director of the Company since October 1990. He
joined Norwest Venture Capital Management Inc., a venture capital firm, in
1984, and is currently the partner responsible for its east coast office. Mr.
Parizeau is also a partner of Itasca Partners, the General Partner of Norwest
Equity Partners IV L.P. In addition to serving as a director of the Company,
Mr. Parizeau is also a director of Geltex Pharmaceuticals, Inc., a developer
of non-absorbed polymer-based pharmaceuticals, Raptor Systems, Inc., a
developer of Internet security software, and Workgroup Technology, a developer
of product data management software.
DIRECTORS; COMMITTEES
The Company's By-Laws provide for a Board of Directors of one or more
directors, and the number of directors is currently fixed at seven. Under the
terms of the Company's Amended and Restated Certificate of Incorporation to be
effective upon the closing of the offering, the Board of Directors is composed
of three classes of similar size, each elected in a different year, so that
only approximately one-third of the Board of Directors is elected in any
single year. John M. Reynolds and Ernest C. Parizeau are designated Class I
directors and have been elected for a term expiring in 1997 and until their
successors are elected and qualified; Joshua Bekenstein and Linda Mason are
designated Class II directors and have been elected for a term expiring in
1998 and until their successors are elected and qualified; and Roger H. Brown,
Robert S. Benson and Dr. Sara Lawrence-Lightfoot are designated Class III
directors and have been elected for a term expiring in 1999 and until their
successors are elected and qualified. Executive officers of the Company are
elected by the Board of Directors and serve at the discretion of the Board.
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee, consisting of Joshua Bekenstein and Ernest C.
Parizeau, has the authority to approve salaries and bonuses and other
compensation matters for officers of the Company, to approve employee health
and benefit plans and to administer the Company's stock plans. The Audit
Committee, consisting of John M. Reynolds and Ernest C. Parizeau, has the
authority to recommend the appointment of the Company's independent auditors
and review the results and scope of audits, internal accounting controls and
tax and other accounting related matters. The Company does not have a
Nominating Committee.
36
<PAGE>
DIRECTOR COMPENSATION
Dr. Sara Lawrence-Lightfoot is paid $1,000 for each Board of Directors
meeting attended. None of the other members of the Board of Directors of the
Company receives any compensation.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table shows all compensation paid
by the Company for services rendered during fiscal 1996, to the Chief
Executive Officer and the three highest paid executive officers who received
more than $100,000 in salary and bonus during fiscal 1996 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
------------------------ ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(2) COMPENSATION(3)
- --------------------------- ----------- ---------------------------
<S> <C> <C> <C>
Roger H. Brown......................... $147,365 $50,000 $1,517
Chairman and Chief Executive Officer
Linda A. Mason(4)...................... $ 51,106 $17,250 $ 471
President
Stephen I. Dreier...................... $133,446 $30,000 $1,416
Chief Financial Officer, Secretary
and Treasurer
Mary Ann Tocio......................... $132,615 $30,000 $1,474
Chief Operating Officer
</TABLE>
- --------
(1) The Company did not grant options, make restricted stock awards, grant any
stock appreciation rights or make long-term incentive payments to the
Named Executive Officers during fiscal 1996.
(2) Bonuses indicated were paid in fiscal 1996 and were based upon the
officer's performance in fiscal 1995.
(3) Consists of contributions made by the Company on behalf of the Named
Executive Officers to the Company's 401(k) Plan.
(4) Ms. Mason was on maternity leave or worked part-time for all of fiscal
1996.
The table below sets forth information for the Named Executive Officers with
respect to option values at June 30, 1996. None of the Named Executive
officers exercised any options during the fiscal year 1996.
<TABLE>
<CAPTION>
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END
------------------------------- --------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (NUMBER) (NUMBER) ($) ($)
- ---- ------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Roger H. Brown.......... 51,199 12,000
Linda A. Mason.......... 40,999 4,000
Stephen I. Dreier....... 21,760 7,640
Mary Ann Tocio.......... 20,600 8,800
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of June 30,
1996. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of $ per share, less the
applicable exercise price.
STOCK PLANS
1987 Stock Option and Incentive Plan. The Company's 1987 Stock Option and
Incentive Plan (the "1987 Stock Option Plan") was adopted by the Board of
Directors on May 18, 1987 and approved by the Company's stockholders on May
18, 1988. The 1987 Stock Option Plan provides for the issuance of a maximum of
400,000 shares of Common Stock pursuant to the grant to employees and officers
of "incentive stock options" within the meaning of the Internal Revenue Code,
the grant of non-qualified stock options to service providers and directors of
the Company, and the grant to employees, officers and directors to make direct
purchases of stock of the Company. Options granted under the 1987 Stock Option
Plan generally vest annually over a five-year or a seven-year period.
37
<PAGE>
As of November 30, 1996, options to purchase 308,252 shares of Common Stock
at a weighted average exercise price of $3.31 per share were outstanding under
the 1987 Plan. The 1987 Stock Option Plan is administered by the Compensation
Committee of the Board of Directors.
1996 Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the
"Equity Incentive Plan") was adopted by the Board of Directors on August 7,
1996 and by the Company's stockholders on October 17, 1996. The Equity
Incentive Plan is subject to administration by the Board of Directors, unless
the Board delegates such authority to a committee of the Board of Directors.
The Equity Incentive Plan provides for the grant of a variety of stock and
stock-based awards and related benefits, including stock options, restricted
and unrestricted shares, deferred stock, performance awards, rights to receive
cash or shares with respect to an increase in the value of the Common Stock,
cash payments sufficient to offset the federal, state, and local ordinary
income taxes of participants resulting from the transactions under the Equity
Incentive Plan and loans to participants in connection with awards. The Equity
Incentive Plan's eligibility criteria are intended to encompass those
employees of the Company and its subsidiaries as well as other persons or
entities, including directors, who are in a position to make a significant
contribution to the success of the Company or its subsidiaries. There is no
limitation on the number of shares issuable to any participant.
The Equity Incentive Plan permits the granting of options that qualify as
incentive stock options and nonqualified options. The option exercise price of
each option shall be determined by the Board of Directors, but in the case of
incentive stock options shall not be less than 100% of the fair market value
of the shares on the date of grant (110% in the case of incentive stock
options granted to an individual with stockholdings in excess of certain
limits).
In general, and except as otherwise determined by the Board of Directors,
all rights under awards granted pursuant to the Equity Incentive Plan to which
the participant has not become irrevocably entitled will terminate upon
termination of the participant's employment, consulting or service
relationship with the Company. No award granted under the Equity Incentive
Plan (other than an award in the form of an outright transfer of cash or
unrestricted stock) may be transferred other than by will or by the laws of
descent and distribution and during a participant's lifetime an award
requiring exercise may be exercised only by the participant (or in the event
of the participant's incapacity, the person or persons legally appointed to
act on the participant's behalf).
Subject to adjustment for stock splits and similar events, the total number
of shares of Common Stock that can be issued under the Equity Incentive Plan
is 200,000 shares. No options or awards have been granted under the Equity
Incentive Plan to date.
COMPENSATION COMMITTEE--INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Joshua
Bekenstein and Ernest C. Parizeau, neither of whom have served as officers of
the Company.
38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 30, 1996 and as
adjusted to reflect the sale of the shares offered hereby by (i) each person
who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director and Named Executive
Officer of the Company, (iii) all directors and executive officers of the
Company as a group, and (iv) each Selling Stockholder. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below
have sole voting and investment power with respect to their shares of Common
Stock, except to the extent authority is shared by spouses under applicable
law.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
SHARES BENEFICIALLY SHARES BENEFICIALLY OFFERED IN
OWNED PRIOR OWNED AFTER THE OVER-
NAMES TO OFFERING(1)(2)(3) NUMBER OF OFFERING(1)(2)(3)
----- ----------------------- SHARES ----------------------ALLOTMENT
DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT OFFERED NUMBER PERCENT OPTION(4)
- -------------------------------- ------------ ---------- --------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Joshua Bekenstein(5)+... 555,473 23.5% 1,297 326,278 244
Ernest C. Parizeau(6)+.. 425,025 18.0% -- 249,056 --
Roger H. Brown(7)+*..... 259,706 10.7% -- 259,706 --
Linda A. Mason(8)+*..... 246,506 10.3% -- 246,506 --
John M. Reynolds(9)+.... 100,364 4.2% 12,378 61,017 2,330
Stephen I. Dreier(10)*.. 23,640 ** -- 23,640 --
Mary Ann Tocio(11)*..... 23,200 ** -- 23,200 --
Robert S. Benson(12)+... 8,000 ** -- 8,000 --
Dr. Sara Lawrence-
Lightfoot(13)+.......... 3,000 ** -- 3,000 --
All Directors and
Executive Officers as a
Group
(9 persons)(14)........ 1,440,409 57.3% 13,675 995,896 2,574
<CAPTION>
5% STOCKHOLDERS
- ---------------
<S> <C> <C> <C> <C> <C> <C>
The Bain Funds.......... 552,330 23.4% 227,897 324,433 42,898
Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Bessemer Venture
Partners................ 450,112 19.1% 185,720 264,392 34,959
1025 Old Country Road,
Suite 205
Westbury, NY 11590
Norwest Equity Partners
IV...................... 425,025 18.0% 175,369 249,656 33,011
40 William Street, Suite
305
Wellesley, MA 02181
William Blair Venture
Partners................ 258,900 11.0% 106,824 152,076 20,108
222 West Adams Street
Chicago, IL 60606
Boston Capital Ventures. 151,794 6.4% 62,632 89,162 11,790
45 School Street
Boston, MA 02108
<CAPTION>
OTHER SELLING STOCKHOLDERS
- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Family Ventures......... 76,634 3.2% 19,241 27,393 3,622
Bright Horizons
Associates.............. 76,634 3.2% 12,378 27,393 2,330
Reynolds Revocable Trust
of July 1, 1983......... 35,364 1.7% 14,591 20,773 2,747
Adam Kirsch............. 1,256 ** 518 738 98
Geoffrey Rehnert........ 3,143 ** 1,297 1,846 244
W. Mitt Romney.......... 3,143 ** 1,297 1,846 244
Robert F. White......... 3,773 ** 1,557 2,216 293
James H. Furneaux....... 9,008 ** 3,717 5,291 700
Douglass Wooden......... 16,667 ** 6,877 9,790 1,294
Anne Whitman............ 3,621 ** 1,494 2,127 281
Neil H. Brownstein...... 7,250 ** 2,991 4,259 563
Brimstone Island Company
L.P. ................... 3,000 ** 1,238 1,762 233
Paul Bancroft III....... 9,000 ** 3,713 5,287 699
Robert Buescher......... 2,000 ** 825 1,175 155
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
SHARES BENEFICIALLY SHARES BENEFICIALLY OFFERED IN
OWNED PRIOR OWNED AFTER THE OVER-
NAMES TO OFFERING(1)(2)(3) NUMBER OF OFFERING(1)(2)(3)
----- ---------------------- SHARES ---------------------- ALLOTMENT
OTHER SELLING STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT OPTION(4)
- -------------------------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William T. Burgin....... 6,000 ** 2,476 3,524 466
Cardwell Children's
Trust................... 3,000 ** 1,238 1,762 233
Christopher F. O.
Gabrieli................ 450 ** 186 264 35
R. Daniel Saxe, Jr. .... 2,250 ** 928 1,322 175
John I. Wechsler........ 3,200 ** 1,320 1,880 249
</TABLE>
- --------
+ Director of the Company
* Named Executive Officer
** Less than one percent
(1) Unless otherwise indicated in these footnotes, each of the persons or
entities named in the table has sole voting and sole investment power with
respect to all shares shown as beneficially owned by that person, subject
to applicable community property laws.
(2) For purposes of determining beneficial ownership of the Company's Common
Stock, owners of options exercisable within 60 days are considered to be
the beneficial owners of the shares of Common Stock for which such
securities are exercisable.
(3) The percentage ownership of the outstanding Common Stock reported herein
is based on the assumption (expressly required by the applicable rules of
the Securities and Exchange Commission) that only the person whose
ownership is being reported has converted his options into shares of
Common Stock.
(4) Assumes that the Underwriter's over-allotment option is exercised in full.
(5) Includes 552,330 shares of Common Stock owned by certain of The Bain
Funds, with which the named stockholder is affiliated by virtue of being a
general partner or principal, or a general partner or a principal of the
general partner, of such fund, and as to whose shares he disclaims
beneficial interest of, except to the extent of any individual interest in
such entities.
(6) Includes 425,025 shares of Common Stock owned by certain of the funds of
Norwest Venture Capital Management, Inc., with which the named stockholder
is affiliated by virtue of being a general partner or principal, or a
general partner or a principal of the general partner, of each of the
funds, and as to whose shares he disclaims beneficial interest of, except
to the extent of any individual interest in such entities.
(7) Includes 55,199 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after November 30, 1996,
100,000 shares of Common Stock owned by Linda A. Mason and 4,507 shares
held in joint tenancy with Linda A. Mason. Excludes 8,000 shares of Common
Stock which are not exercisable within 60 days after November 30, 1996.
(8) Includes 41,999 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after November 30, 1996,
100,000 shares of Common Stock owned by Roger H. Brown and 4,507 shares
held in joint tenancy with Roger H. Brown. Excludes 3,000 shares of Common
Stock which are not exercisable within 60 days after November 30, 1996.
(9) Includes 33,160 shares of Common Stock held in the Reynolds Revocable
Trust of July 1, 1983, 30,000 shares of Common Stock held by Bright
Horizons Associates, and 5,000 shares of Common Stock subject to purchase
upon exercise of stock options exercisable within 60 days after November
30, 1996.
(10) Includes 23,640 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after November 30, 1996.
Excludes 5,760 shares of Common Stock which are not exercisable within 60
days after November 30, 1996.
(11) Includes 23,200 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after November 30, 1996.
Excludes 6,200 shares of Common Stock which are not exercisable within 60
days after November 30, 1996.
(12) Includes 1,000 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after November 30, 1996.
Excludes 2,000 shares of Common Stock which are not exercisable within 60
days after November 30, 1996.
(13) Includes 3,000 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after November 30, 1996.
Excludes 2,000 shares of Common Stock which are not exercisable within 60
days after November 30, 1996.
(14) Includes 153,040 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after November 30, 1996.
Excludes 26,960 shares of Common Stock which are not exercisable within
60 days after November 30, 1996.
40
<PAGE>
CERTAIN TRANSACTIONS
CERTAIN STOCK TRANSACTIONS
In 1987, the Company issued 600,000 shares of its Series A Mandatorily
Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") to
certain directors and other investors at a per share purchase price of $3.33.
Prior to the closing of the offering herein, each holder of the Series A
Preferred Stock converted each share of such Series A Preferred Stock into one
share of Common Stock of the Company.
In October 1988, the Company also sold to certain directors and 5%
stockholders or their affiliated entities an aggregate of 600,000 shares of
Series B Mandatorily Redeemable Convertible Preferred Stock (the "Series B
Preferred Stock") at a per share purchase price of $6.67. Prior to the closing
of the offering herein, each holder of the Series B Preferred Stock converted
each share of such Series B Preferred Stock into one share of Common Stock of
the Company.
On July 13, 1990, the Company issued to certain of its directors, executive
officers and existing stockholders or their affiliated entities subordinated
term notes (the "Bridge Notes") in an aggregate amount of $1,119,999.99 and
warrants (the "Bridge Warrants") to purchase 84,000 shares of its Common Stock
at an exercise price of $1.00 per share.
In October and November of 1990, the Company issued to certain directors,
executive officers and 5% stockholders or their affiliated entities an
aggregate of 660,330 shares of Series C Mandatorily Redeemable Convertible
Preferred Stock (the "Series C Preferred Stock," collectively with the Series
A Preferred Stock and Mandatorily Redeemable Series B Preferred Stock, the
"Convertible Preferred Stock") and warrants to purchase 103,049 shares of
Common Stock (the "Series C Warrants" and, together with the Bridge Warrants,
the "Warrants"), of which 4,000 of such Series C Warrants have been
repurchased by the Company. The Series C Preferred Stock was sold at a price
of $7.50 per share and the Series C Warrants were issued with an exercise
price of $1.00 per share. In lieu of paying cash upon the exercise of the
Warrants, the holders of Warrants have the right to have the Company convert,
without the payment of cash, all or a portion of the Warrants into shares of
Common Stock. The Bridge Notes were canceled in connection with the issuance
of the Series C Preferred Stock. The Warrants expire upon the earlier to occur
of October 12, 1997 or the closing of a "Qualified Public Offering" (as
defined therein). Accordingly, prior to the closing of the offering, the
holders of the Warrants elected to exercise their right to convert such
Warrants on a cashless basis into a number of shares of Common Stock which is
expected to be 168,952 (based on an assumed initial public offering price of
$ per share). In addition, prior to the closing of the offering herein, each
holder of the Series C Preferred Stock converted each share of the Series C
Preferred Stock into one share of Common Stock.
On January 30, 1995, the Board of Directors extended the exercise period for
the Warrants to October 12, 1997. In addition, on July 29, 1996 the Company
amended its Certificate of Incorporation of the Company to extend the
redemption date for the Series C Convertible Preferred Stock to October 1,
1997 and the redemption date for the Series A and Series B Convertible
Preferred Stock to November 1, 1997.
The holders of the Common Stock issued upon conversion of Convertible
Preferred Stock or exercise of the Series C Warrants (the "Registrable
Shares") are entitled to require the Company to register under the Securities
Act of 1933 (the "Act") up to a total of 2,029,282 shares, of which 850,000
are being registered in this offering. See "Shares Eligible for Future Sale--
Registration Rights."
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Effective upon the closing of the offering, the authorized capital stock of
the Company consists of 12,000,000 shares of Common Stock, par value $.01 per
share, and 3,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). As of September 30, 1996, on a pro forma basis giving
effect to the conversion of the Convertible Preferred Stock into 1,860,330
shares of Common Stock and the exercise of outstanding warrants to purchase
168,952 shares of Common Stock, there were 2,360,869 shares of Common Stock
outstanding, held of record by 69 stockholders. Based on the number of shares
outstanding as of that date and giving effect to the issuance of shares of
Common Stock offered by the Company hereby, there will be shares of Common
Stock outstanding upon the closing of this offering. There will be no shares
of Preferred Stock outstanding upon the closing of this offering.
Each holder of Common Stock is entitled to one vote per share for the
election of directors and for all other matters to be voted on by the
Company's stockholders. Subject to preferences that may be applicable to any
outstanding series of Preferred Stock, the holders of Common Stock are
entitled to share ratably in such dividends, if any, as may be declared from
time to time by the Board of Directors from funds legally available therefore.
See "Dividend Policy." Upon liquidation or dissolution of the Company, subject
to preferences that may be applicable to any outstanding series of Preferred
Stock, the holders of Common Stock are entitled to share ratably in all assets
available for distribution to stockholders. There are no preemptive or other
subscription rights, conversion rights, or redemption or sinking fund
provisions with respect to shares of Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
The Company's Amended and Restated Certificate of Incorporation provides
that the Company may, by vote of its Board of Directors, designate the
numbers, relative rights, preferences and limitations of one or more series of
Preferred Stock and issue the securities so designated. Such provisions may
discourage or preclude certain transactions, whether or not beneficial to
stockholders, and could discourage certain types of tactics that involve an
actual or threatened acquisition or change of control of the Company. The
Company has no current intention to issue any of its unissued, authorized
shares of Preferred Stock. However, the issuance of any shares of Preferred
Stock in the future could adversely affect the rights of the holders of Common
Stock. The Amended and Restated Certificate of Incorporation provides that no
director of the Company shall be liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty, except to the extent
otherwise required by Delaware General Corporation Law. This provision does
not prevent stockholders from obtaining injunctive or other relief against the
directors nor does it shield directors from liability under federal or state
securities laws.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Amended and Restated Certificate of Incorporation and Amended and
Restated By-laws provide for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms.
See "Management." In addition, the Amended and Restated Certificate of
Incorporation and Amended and Restated By-laws provide that directors may be
removed only for cause by the affirmative vote of the holders of two-thirds of
the shares of capital stock of the Company entitled
42
<PAGE>
to vote. Under the Amended and Restated Certificate of Incorporation and the
Amended and Restated By-laws, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Amended and Restated Certificate of Incorporation and Amended and
Restated By-laws also provide that any action required or permitted to be
taken by the stockholders of the Company at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before
such meeting and may not be taken by written action in lieu of a meeting. The
Amended and Restated Certificate of Incorporation and the Amended and Restated
By-laws further provide that special meetings of the stockholders may only be
called by the Chairman of the Board of Directors, the Chief Executive Officer
or, if none, the President of the Company or by the Board of Directors. Under
the Company's Amended and Restated By-laws, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders'
meeting stockholder actions which are favored by the holders of a majority of
the outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Common
Stock, because such person or entity, even if it acquired a majority of the
outstanding voting securities of the Company, would be able to take action as
a stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders' meeting, and not by written consent.
The Company's Amended and Restated Certificate of Incorporation contains
certain provisions permitted under the General Corporation Law of Delaware
relating to the liability of directors. The provisions eliminate a director's
liability to the Company or its stockholders for monetary damages for a breach
of fiduciary duty, except in circumstances involving certain wrongful acts,
such as the breach of a director's duty of loyalty or acts or omissions which
involve intentional misconduct or a knowing violation of law. The Amended and
Restated Certificate of Incorporation also contains provisions obligating the
Company to indemnify its directors to the fullest extent permitted by the
General Corporation Law of Delaware. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Fleet National
Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering based on the number of shares outstanding as
of September 30, 1996, the Company will have outstanding shares of Common
Stock. Of these shares, shares, including the shares sold in the
offering, will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company as that term is defined in Rule 144 under the Securities Act (an
"Affiliate"). Any shares purchased in the offering by an Affiliate of the
Company may not be resold except pursuant to an effective registration
statement filed by the Company or an applicable exemption from registration,
including an exemption under Rule 144.
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock are deemed "restricted securities"
under Rule 144. Of these restricted securities, up to shares may be
eligible for sale in the public market
43
<PAGE>
immediately after the offering pursuant to Rule 144(k) under the Securities
Act; of these shares are subject to the lock-up agreements described
below (the "Lock-up Agreements"). Beginning 90 days and 180 days after the
Effective Date, approximately an additional and Restricted Shares,
respectively, will first become eligible for sale in the public market
pursuant to Rules 144 and 701 promulgated under the Securities Act, upon the
expiration of certain Lock-up Agreements with the Underwriters, or as a result
of a combination of the foregoing. Of the Restricted Shares that will first
become eligible for sale in the public market 180 days after the Effective
Date, approximately shares will be subject to certain volume and other
resale restrictions pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated for purposes of such rule), including an
Affiliate, who has beneficially owned restricted securities (as that term is
defined in Rule 144) for a period of at least two years from the later of the
date such restricted securities were acquired from the Company or the date
they were acquired from an Affiliate, is entitled to sell, within any three-
month period, a number of such securities that does not exceed the greater of
1% of the then outstanding shares of the Company's Common Stock (approximately
shares immediately after the offering) or the average weekly trading
volume in the Company's Common Stock on the Nasdaq National Market or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain restrictions on the manner of sale, notice
requirements, and the availability of current public information about the
Company. Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing volume limitations and other restrictions, but
without regard to the two-year holding period.
Under Rule 144(k), if a period of at least three years has elapsed between
the later of the date restricted securities were acquired from the Company and
the date they were acquired from an Affiliate of the Company, a holder of such
restricted securities who is not an Affiliate of the Company at the time of
the sale and has not been an Affiliate of the Company from at least three
months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
Rule 701 under the Act provides that the shares of Common Stock acquired on
the exercise of currently outstanding options may be resold by persons, other
than affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates under
Rule 144 without compliance with its two-year minimum holding period, subject
to certain limitations.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. The Company is unable
to estimate the number of shares that may be sold in the public market
pursuant to Rule 144, since this will depend on the market price of Common
Stock, the personal circumstances of the sellers and other factors.
Nevertheless, sales of significant amounts of the Common Stock of the Company
in the public market could adversely affect the market price of the Company's
Common Stock.
LOCK-UP AGREEMENTS
The Company and certain of its directors, officers and stockholders,
including affiliates of the Company, have agreed not to offer or sell or
otherwise dispose of any Common Stock or any securities convertible into or
exchangeable or exercisable for any such shares until the expiration of 180
days following the date of this Prospectus without the prior written consent
of the Representatives of the Underwriters. See "Underwriting."
STOCK OPTIONS
The Company intends to file one or more registration statements on Form S-8
under the Act to register all shares of Common Stock subject to outstanding
stock options and Common Stock issuable
44
<PAGE>
pursuant to the Company's stock option and purchase plans that do not qualify
for an exemption under Rule 701 from the registration requirements of the Act.
The Company expects to file these registration statements 90 days following
the closing of the offering, and such registration statements are expected to
become effective upon filing. Shares covered by these registration statements
will thereupon be eligible for sale in the public markets, subject to the
Lock-up Agreements, to the extent applicable.
REGISTRATION RIGHTS
The holders of the Common Stock issued upon conversion of the Convertible
Preferred Stock or exercise of the Warrants (the "Registrable Shares") are
entitled to require the Company to register under the Securities Act of 1933
(the "Act") up to a total of approximately 2,029,282 shares of Common Stock,
of which 850,000 are being registered in this offering. The agreements
governing the purchase of the Convertible Preferred Stock provide that in the
event the Company proposes to register any of its securities under the Act at
any time or times, the holders of the Convertible Preferred Stock, subject to
certain exceptions, shall be entitled to include the Registrable Shares in
such registration. However, the managing underwriter of any such offering may
exclude for marketing reasons some or all of such Registrable Shares from such
registration. The holders of Convertible Preferred Stock have, subject to
certain conditions and limitations, additional rights to require the Company
to prepare and file a registration statement under the Act with respect to
their Registrable Shares if holders of the Convertible Preferred Stock holding
at least 30% of the Registrable Shares held by all holders of Convertible
Preferred Stock so request. The Company is generally required to bear the
expenses of all such registrations, except underwriting discounts and
commissions. Additionally, under a common stock purchase warrant (the
"GreenTree Warrant") issued by the Company in connection with the acquisition
of GreenTree, ServiceMaster has been granted certain "piggy-back" registration
rights with respect to the 40,000 shares of Common Stock issuable upon
exercise of the GreenTree Warrant.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and EVEREN Securities, Inc. have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated....................................
EVEREN Securities, Inc. ...........................................
Total..........................................................
---
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Company and the Selling Stockholders have been advised by the
Representative of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representative of
the Underwriters.
The Company and Selling Stockholders have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to additional shares of Common Stock, at the initial
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
shares of Common Stock offered hereby, and the Company and Selling
Stockholders will be obligated, pursuant to the option, to sell such shares to
the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
The Company, each of its officers and directors, and certain of its security
holders have agreed, subject to certain exceptions, not to offer, sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters, except to the extent being sold in the
offering. The Representatives of the Underwriters may, in their sole
discretion and at any time without notice, release all or any portion of the
securities subject to Lock-up Agreements. See "Shares Eligible for Future
Sale."
46
<PAGE>
The Representatives of the Underwriters have advised the Company and the
Selling Stockholders that the Underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations among the Company, representatives of
the Selling Stockholders and the Representatives of the Underwriters. Among
the factors to be considered in such negotiations are the prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalizations and stages of development of other companies which this
Company, representatives of the Selling Stockholders and the Representative of
the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. Application has been made to
have the Common Stock approved for quotation on The Nasdaq National Market
under the symbol "BRHZ."
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Ropes & Gray, Boston, Massachusetts.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Testa, Hurwitz & Thibeault, LLP, who advises the Company
on labor and employment matters.
EXPERTS
The financial statements of each of Bright Horizons Children's Centers, Inc.
and GreenTree Child Care Services, Inc. included in this Prospectus have been
so included in reliance on the reports of Price Waterhouse LLP, independent
accountants, as of the dates indicated in their reports appearing elsewhere
herein and on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement, to
which reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to above are
necessarily incomplete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement reference is hereby
made to the exhibit for a more complete description of the matter involved,
and each statement shall be deemed qualified in its entirety by such
reference. The Registration Statement, including exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, Thirteenth Floor, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be
obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding the Company; the address of such site is
http://www.sec.gov.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheet............................................... F-3
Consolidated Statement of Income......................................... F-4
Consolidated Statement of Changes in Stockholders' Deficit............... F-5
Consolidated Statement of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
GREENTREE CHILD CARE SERVICES, INC.
Report of Independent Accountants........................................ F-17
Balance Sheet............................................................ F-18
Statement of Operations.................................................. F-19
Statement of Changes in Stockholder's Deficit............................ F-20
Statement of Cash Flows.................................................. F-21
Notes to Financial Statements............................................ F-22
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
Unaudited Pro Forma Combined Financial Data.............................. F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Bright Horizons Children's
Centers, Inc.
The 1-for-5 reverse stock split and the additional common and preferred
shares authorized described in Note 13 to the financial statements have not
been consummated at December 13, 1996. When they have been consummated, we
will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' deficit and of
cash flows present fairly, in all material respects, the financial position of
Bright Horizons Children's Centers, Inc. and its subsidiaries at June 30, 1995
and 1996, and the results of their operations and their cash flows for each of
the three years in the period 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 audits. We conducted our
audits 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 audits provide a reasonable basis for the opinion expressed above."
Price Waterhouse LLP
Boston, Massachusetts
August 1, 1996
F-2
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, PRO FORMA
-------------------------- (NOTE 7)
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1996
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 4,087,939 $ 4,583,257 $ 5,340,856 $ 5,340,856
Accounts receivable,
trade, net of
allowance for
doubtful accounts of
$111,636 and $307,458
at June 30, 1995 and
1996, respectively,
and $313,202 at
September 30, 1996
(unaudited).......... 1,799,504 2,162,615 2,091,542 2,091,542
Prepaid expenses and
other current assets. 461,352 1,000,415 1,674,576 1,674,576
Deferred income taxes. 320,000 2,284,000 2,141,000 2,141,000
------------ ------------ ------------ ------------
Total current
assets............... 6,668,795 10,030,287 11,247,974 11,247,974
Fixed assets, net....... 4,701,859 8,206,073 8,510,133 8,510,133
Goodwill, net........... 491,346 2,185,202 2,163,020 2,163,020
Other intangible assets,
net.................... 520,000 1,782,334 1,617,223 1,617,223
Other assets............ 88,060 131,471 158,858 158,858
Deferred income taxes... 500,000 894,000 940,000 940,000
------------ ------------ ------------ ------------
$ 12,970,060 $ 23,229,367 $ 24,637,208 $ 24,637,208
============ ============ ============ ============
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Line of credit........ $ -- $ 500,000 $ -- $ --
Current portion of
long-term debt and
obligations under
capital leases....... 124,956 485,250 480,363 480,363
Accounts payable and
accrued expenses..... 3,457,203 4,771,808 6,423,130 6,423,130
Income taxes payable.. 33,452 87,856 6,771 6,771
Deferred revenue...... 2,153,478 3,231,446 3,485,632 3,485,632
------------ ------------ ------------ ------------
Total current
liabilities.......... 5,769,089 9,076,360 10,395,896 10,395,896
Long-term debt and
obligations under
capital leases.......... 748,701 4,247,559 4,270,745 4,270,745
Accrued rent............ 384,085 1,665,279 1,632,731 1,632,731
Other long-term
liabilities............. 6,917 6,917 6,354 6,354
Deferred revenue........ -- 841,666 816,666 816,666
------------ ------------ ------------ ------------
6,908,792 15,837,781 17,122,392 17,122,392
------------ ------------ ------------ ------------
Mandatorily redeemable
convertible preferred
stock, $.01 par value;
1,860,330 shares
authorized, issued and
outstanding, at
issuance cost plus
accumulated dividends
of $6,634,254,
$7,732,455 and
$8,007,011 at June 30,
1995 and 1996 and
September 30, 1996
(unaudited),
respectively, none
outstanding pro forma.. 17,508,535 18,606,736 18,881,292 --
------------ ------------ ------------ ------------
Stockholders' equity
(deficit):
Preferred stock, $.01
par value, 3,000,000
shares authorized,
none issued or
outstanding..........
Common stock, $.01 par
value; 12,000,000
shares, authorized;
320,738, 330,419 and
331,587 shares issued
and outstanding at
June 30, 1995 and
1996 and September
30, 1996 (unaudited),
respectively, and
2,191,917 shares
issued and
outstanding pro
forma................ 3,207 3,304 3,316 21,919
Additional paid-in
capital.............. 53,146 62,536 64,782 18,927,471
Accumulated deficit... (11,503,620) (11,280,990) (11,434,574) (11,434,574)
------------ ------------ ------------ ------------
Total stockholders'
equity (deficit)..... (11,447,267) (11,215,150) (11,366,476) 7,514,816
------------ ------------ ------------ ------------
Commitments (Note 12)... -- -- -- --
------------ ------------ ------------ ------------
$ 12,970,060 $ 23,229,367 $ 24,637,208 $ 24,637,208
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............ $32,012,412 $43,693,026 $64,181,377 $11,932,051 $19,712,863
Cost of services........ 27,592,521 37,208,535 55,614,948 10,467,447 17,215,042
----------- ----------- ----------- ----------- -----------
Gross profit........... 4,419,891 6,484,491 8,566,429 1,464,604 2,497,821
Selling, general and
administrative
expenses............... 3,577,304 5,174,518 6,376,212 1,258,409 2,048,372
Amortization of non-
compete agreements..... -- 80,000 1,680,031 86,671 140,001
----------- ----------- ----------- ----------- -----------
Income from operations. 842,587 1,229,973 510,186 119,524 309,448
Interest income......... 37,945 99,210 97,544 37,754 29,804
Interest expense........ (55,074) (78,549) (291,899) (21,854) (98,280)
----------- ----------- ----------- ----------- -----------
Income before income
taxes ................ 825,458 1,250,634 315,831 135,424 240,972
Income tax benefit
(provision)............. 319,000 382,000 1,005,000 430,000 (120,000)
----------- ----------- ----------- ----------- -----------
Net income............. $ 1,144,458 $ 1,632,634 $ 1,320,831 $ 565,424 $ 120,972
=========== =========== =========== =========== ===========
Unaudited pro forma data
(Note 1):
Net income per share.... $ 0.51 $ 0.05
=========== ===========
Weighted average number
of common and common
equivalent shares...... 2,596,846 2,591,997
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL TOTAL
NUMBER OF PAR PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT DEFICIT
--------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30,
1993.................... 316,603 $3,166 $49,031 $(12,083,412) $(12,031,215)
Exercise of stock
options.............. 3,074 31 3,047 -- 3,078
Accretion of
mandatorily
redeemable
convertible preferred
stock dividends...... -- -- -- (1,099,099) (1,099,099)
Net income............ -- -- -- 1,144,458 1,144,458
------- ------ ------- ------------ ------------
Balance at June 30,
1994.................... 319,677 3,197 52,078 (12,038,053) (11,982,778)
Exercise of stock
options.............. 1,061 10 1,068 -- 1,078
Accretion of
mandatorily
redeemable
convertible preferred
stock dividends...... -- -- -- (1,098,201) (1,098,201)
Net income............ -- -- -- 1,632,634 1,632,634
------- ------ ------- ------------ ------------
Balance at June 30,
1995.................... 320,738 3,207 53,146 (11,503,620) (11,447,267)
Exercise of stock
options.............. 9,681 97 9,390 -- 9,487
Accretion of
mandatorily
redeemable
convertible preferred
stock dividends...... -- -- -- (1,098,201) (1,098,201)
Net income............ -- -- -- 1,320,831 1,320,831
------- ------ ------- ------------ ------------
Balance at June 30,
1996.................... 330,419 3,304 62,536 (11,280,990) (11,215,150)
Exercise of stock
options (unaudited).. 1,168 12 2,246 -- 2,258
Accretion of
mandatorily
redeemable
convertible preferred
stock dividends
(unaudited).......... -- -- -- (274,556) (274,556)
Net income
(unaudited).......... -- -- -- 120,972 120,972
------- ------ ------- ------------ ------------
Balance at September 30,
1996 (unaudited)....... 331,587 $3,316 $64,782 $(11,434,574) $(11,366,476)
======= ====== ======= ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $1,144,458 $1,632,634 $1,320,831 $ 565,424 $ 120,972
Adjustments to
reconcile net income
to net cash provided
by operating
activities, net of
acquired amounts:
Depreciation and
amortization.......... 647,231 871,320 2,831,208 302,069 519,335
Loss (gain) on
disposal of fixed
assets................. 7,430 100,123 (23,448) (6,138) 12,363
Write-down of impaired
assets................. -- 160,923 -- -- --
Decrease in goodwill
from utilization of
acquired tax benefits.. -- -- 1,142,000 -- --
Changes in assets and
liabilities:
Deferred income taxes.. (350,000) (470,000) (2,358,000) (430,000) 97,000
Accounts receivable,
trade................. (128,690) (895,360) 300,598 506,719 71,073
Prepaid expenses and
other current assets.. 74,232 (139,164) (351,312) (178,561) (674,161)
Accounts payable and
accrued expenses...... 732,369 215,200 663,921 161,130 1,651,322
Income taxes payable... 15,000 18,452 54,404 (33,452) (81,085)
Deferred revenue....... 550,503 10,144 1,409,138 111,189 229,186
Accrued rent........... 1,407 (9,475) (68,252) 8,911 (32,548)
Other long-term
liabilities........... (21,818) (2,666) -- (563) (563)
---------- ---------- ---------- ---------- ----------
Total adjustments.... 1,527,664 (140,503) 3,600,257 441,304 1,791,922
---------- ---------- ---------- ---------- ----------
Net cash provided by
operating
activities.......... 2,672,122 1,492,131 4,921,088 1,006,728 1,912,894
---------- ---------- ---------- ---------- ----------
Cash flows from
investing activities:
Purchase of short-term
investments........... (400,000) -- -- -- --
Proceeds from sale of
short-term
investments........... -- 400,000 -- -- --
Additions to fixed
assets, net of
acquired amounts...... (1,006,108) (1,910,711) (1,715,577) (609,354) (674,696)
Proceeds from disposal
of fixed assets....... 9,947 58,777 32,725 7,000 26,231
(Increase) decrease in
other assets.......... (77,318) 209 (39,204) -- (27,387)
Payment for
acquisition, net of
acquired cash......... -- (509,874) (3,067,089) -- --
---------- ---------- ---------- ---------- ----------
Net cash used in
investing
activities.......... (1,473,479) (1,961,599) (4,789,145) (602,354) (675,852)
---------- ---------- ---------- ---------- ----------
Cash flows from
financing activities:
Proceeds from issuance
of common stock....... 3,078 1,078 9,487 892 2,258
Net borrowings under
line of credit........ -- -- 500,000 0 (500,000)
Principal payment of
long-term debt and
obligations under
capital leases........ (62,209) (87,607) (146,112) (7,947) 18,299
---------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities.......... (59,131) (86,529) 363,375 (7,055) (479,443)
---------- ---------- ---------- ---------- ----------
Net increase
(decrease) in cash
and cash
equivalents......... 1,139,512 (555,997) 495,318 397,319 757,599
Cash and cash
equivalents, beginning
of period............... 3,504,424 4,643,936 4,087,939 4,087,939 4,583,257
---------- ---------- ---------- ---------- ----------
Cash and cash
equivalents, end of
period.................. $4,643,936 $4,087,939 $4,583,257 $4,485,258 $5,340,856
========== ========== ========== ========== ==========
Supplemental disclosure
of cash flow
information:
Cash paid for interest.. $ 55,435 $ 78,549 $ 81,521 $ 16,387 $ 103,714
========== ========== ========== ========== ==========
Cash paid for income
taxes................... $ 28,111 $ 70,284 $ 156,596 $ 102,652 $ 216,088
========== ========== ========== ========== ==========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
The Company acquired certain centers by entering into mortgages of
approximately $978,000 (Note 6).
During fiscal years 1995 and 1996, capital lease obligations of $46,888 and
$27,264, respectively, were incurred in connection with lease agreements for
automobiles and office equipment.
The Company purchased child care management companies during the fiscal year
1995 and 1996. In conjunction with these acquisitions, liabilities were
assumed as follows:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Fair value of assets acquired.......................... $1,186,939 $ 8,577,717
Cash paid.............................................. (509,874) (3,067,089)
---------- -----------
Liabilities assumed, including note payable............ $ 677,065 $ 5,510,628
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bright Horizons Children's Centers, Inc. (the "Company") was incorporated on
December 29, 1986, and is engaged in the development and management of high-
quality work-site child care centers throughout the United States. The Company
operates its centers under various types of arrangements,which generally can
be classified into two forms: (i) the corporate-sponsored model, where Bright
Horizons operates a child care center on the premises of a corporate sponsor
and gives priority enrollment to the corporate sponsor and (ii) the management
contract model, where Bright Horizons manages a work-site child care center
for a management fee, typically for a single employer. The Company's primary
customers are large companies as well as individual customers. The Company
receives tuition and management fees for its services. The following is a
summary of significant accounting policies employed by the Company in the
preparation of the accompanying consolidated financial statements.
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Interim Financial Data (Unaudited)--The interim financial data included in
the accompanying consolidated financial statements and notes thereto is
unaudited; however, in the opinion of the Company, the interim financial data
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. The
interim financial data are not necessarily indicative of the results of
operations for a full fiscal year.
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,
and 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 and Cash Equivalents--For purposes of the statement of cash flows, the
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company invests excess cash
in money market accounts, repurchase agreements, and certificates of deposit.
Accordingly, the investments are subject to minimal credit and market risk.
All of the Company's investments are classified as available-for-sale. The
carrying amount approximates fair value because of the short maturity of the
instruments.
The Company at June 30, 1996 and periodically throughout the year has
maintained cash balances in various operating accounts in excess of federally
insured limits. The Company limits the amount of credit exposure with any one
financial institution by evaluating the creditworthiness of the financial
institutions with which it invests.
Fair Value of Financial Instruments:
Long-term Debt--The carrying amount approximates fair value. The fair value
is estimated based on the current rates offered to the Company for debt of the
same remaining maturities.
Mandatorily Redeemable Convertible Preferred Stock--The fair value of the
mandatorily redeemable convertible preferred stock is estimated to be
$23,254,125. Fair value is estimated based on common stock equivalent of the
preferred stock at the fair market value of the common stock at June 30, 1996.
This estimate is not necessarily indicative of the amount the holders could
realize in a current market exchange.
Revenue Recognition--Revenues are 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
tuition payments from corporate sponsors and, to a lesser extent,
F-7
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)
by payments from government agencies. Revenues also include management fees
paid by corporate sponsors which are not material. In the management contract
model, in addition to tuition and management fee revenues, revenue is also
recognized for reimbursable expenses paid either in lieu of, or to supplement,
tuitions. The reimbursable expenses are not material.
Fixed Assets--Fixed assets are recorded at cost and are depreciated over
their estimated useful lives using the straight-line method. Maintenance and
repairs are expensed as incurred.
Intangibles--Goodwill is amortized on a straight-line basis over the
estimated period of benefit, not exceeding twenty-five years. Other intangible
assets, primarily comprised of contract rights, unfavorable leases and non-
compete agreements are amortized over the estimated period of benefit which
ranges from 3 to 10 years. Amortization periods approximate the stated terms
of the respective agreements. At June 30, 1995 and 1996 and September 30, 1996
(unaudited), accumulated amortization of intangible assets was approximately
$104,000, $1,923,361 and $2,110,654, respectively.
Advertising Costs--Advertising costs are expensed as incurred.
Impairment Write-downs--Impairment losses are recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. The impairment write-down represents the net
book value at the time of write-down of goodwill and other assets recorded in
connection with an acquisition that ocurred in fiscal 1994.
Start up costs--Start up costs are costs incurred prior to the opening of a
center facility which include pre-opening operating expenses, which are
expensed as incurred; architectural and design fees, legal fees and real
estate broker fees specifically attributable to a center's facility, which are
capitalized and amortized on a straight-line basis over their estimated period
of benefit, not to exceed twenty-five years; and capital equipment and initial
supplies, which are capitalized and depreciated over their estimated useful
lives using the straight-line method. Start up costs that are either paid by
the Company and reimbursed by a sponsor or paid directly by a sponsor are not
capitalized.
Income Taxes--The Company utilizes the liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 prescribes an asset
and liability approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the financial reporting and tax basis of assets and
liabilities. Deferred tax assets are recognized, net of any valuation
allowance, for the estimated future tax effects of deductible temporary
differences and tax operating loss carryforwards.
Unaudited Pro Forma Net Income Per Share--Pro forma net income per share is
determined by dividing the net income attributable to common stockholders by
the weighted average number of common stock and common stock equivalents
outstanding during the period, assuming the conversion of all convertible
preferred stock. Common stock equivalents (stock options and warrants) issued
at prices below the offering price per share during the twelve months
preceding the anticipated public offering of the Company's common stock have
been included in the calculation of unaudited pro forma net income per share
using the treasury stock method as if outstanding since the beginning of each
period presented.
F-8
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
Effective December 1, 1995, the Company acquired the business and some of
the assets and liabilities of GreenTree Child Care Services, Inc.
("GreenTree"), a child care management company, for approximately $6,000,000,
including a $3,000,000 note payable (see Note 6). The purchase price has been
allocated based on the estimated fair value of the assets and liabilities
acquired at the date of acquisition, $2,000,000 of the purchase price ascribed
to a non-compete agreement between the Company and The ServiceMaster Company,
L.P. (the prior owner of GreenTree) and $1,000,000 of the purchase price
ascribed to contract rights acquired, resulting in goodwill of approximately
$3,000,000, which was reduced by approximately $1,200,000 due to the benefit
of acquired deferred tax assets, and which is being amortized over 25 years.
The Company also issued a common stock purchase warrant for 40,000 shares of
the Company's common stock at an exercise price of $17.50 per share which
expires on November 30, 1998. No value was ascribed to the warrants upon
issuance as such value was considered immaterial. The acquisition was
accounted for by the purchase method. Accordingly, the operating results of
the acquired company have been included from the date of the acquisition.
The following unaudited pro forma summary presents the consolidated results
of operations assuming that the acquisition of GreenTree had occurred on July
1, 1994 and July 1, 1995. No adjustments are required to conform the
accounting policies of the Company and GreenTree. These pro forma results have
been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the transaction been effected on
the date indicated above or of results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net revenues......................................... $56,271,787 $70,440,949
Net income (loss).................................... $ (505,387) $ 987,862
Unaudited pro forma net income per share (Note 1).... $ 0.38
===========
</TABLE>
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
DEPRECIABLE SEPTEMBER 30,
LIVES (YEARS) 1995 1996 1996
--------------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land..................... -- $ 459,438 $ 821,938 $ 821,938
Buildings................ 40 413,578 1,233,772 1,240,202
Furniture and fixtures... 10 990,982 2,604,747 2,638,916
Office equipment......... 5 1,162,879 1,625,219 1,773,001
Educational equipment.... 3-7 1,381,504 1,754,029 1,809,183
Playground equipment..... 15 1,003,875 1,091,921 1,102,877
Leasehold improvements... 3/Life of lease 1,600,087 2,341,541 2,696,619
Automobiles.............. 5 199,538 228,417 228,417
Software................. 3 147,249 168,573 180,192
---------- ---------- ----------
7,359,130 11,870,157 12,491,345
Less--accumulated
depreciation and
amortization............ 2,657,271 3,664,084 3,981,212
---------- ---------- ----------
$4,701,859 $8,206,073 $8,510,133
========== ========== ==========
</TABLE>
F-9
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. FIXED ASSETS--(CONTINUED)
Fixed assets at June 30, 1995 and 1996 include automobiles and office
equipment of $199,538 and $228,417, respectively, held under capital leases.
Amortization expense relating to fixed assets under capital leases was
$14,211, $18,440 and $26,459 for the years ended June 30, 1994, 1995 and 1996,
respectively. Accumulated amortization relating to fixed assets under capital
leases totaled $138,144 and $164,603 at June 30, 1995 and 1996, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
JUNE 30,
---------------------
SEPTEMBER 30,
1995 1996 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable.......................... $ 791,064 $ 379,212 $ 435,419
Accrued payroll and employee benefits..... 1,771,261 2,867,750 3,863,763
Accrued other expenses.................... 894,878 1,524,846 2,123,948
---------- ---------- ----------
$3,457,203 $4,771,808 $6,423,130
========== ========== ==========
</TABLE>
5. LINE OF CREDIT
In August 1994, the Company secured a $2,000,000 line of credit with a bank,
which bears interest at the bank's prime rate (8.25% at June 30, 1996). At
June 30, 1996, $500,000 was outstanding under the line. The credit line
expired on September 30, 1996 at which time the Company can convert the
outstanding borrowings to a term loan at the bank's prime rate plus 0.5%. The
agreement requires the Company to comply with certain covenants which include,
among other things, the maintenance of specified financial ratios and a
prohibition on the declaration and payment of cash dividends. At June 30,
1996, the Company was in substantial compliance with the terms of the
agreement.
6. DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases are summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1995 1996
------- ----------
<S> <C> <C>
Note payable--sixteen quarterly installments including
interest at the variable prime lending rate (8.25% at
June 30, 1996) with a final installment of $187,500 due
in November 2000........................................ $ -- $3,000,000
Mortgage payable to bank in monthly installments of
approximately $5,940 including interest at the bank's
prime lending rate plus 1/4% (8.5% at June 30, 1996),
with a final installment of approximately $2,200
in June 2016; collateralized by related real estate..... -- 528,000
Mortgage payable to bank in monthly installments of
approximately
$4,057 including interest of 9%, with the payment in
full due
in October 2000; collateralized by related real estate.. -- 388,693
Mortgage payable--monthly installments of approximately
$507
including interest of 9%, with the payment in full due
in October 1998; collateralized by related real estate.. -- 48,775
Mortgage payable to bank in monthly installments of
approximately
$6,000 including interest at the bank's prime lending
rate plus 1%
(10% and 9.25% at June 30, 1995 and 1996, respectively),
with a final installment of approximately $654,000 in
November 1999; collateralized by related real estate.... 666,344 658,583
</TABLE>
F-10
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1996
-------- ----------
<S> <C> <C>
Notes payable--three semiannual installments including
interest of 8%
with a final installment of $42,280 due in December
1996.................................................... 150,000 42,280
Obligations under capital leases at rates of 8% to 11.5%,
collateralized by automobiles and certain office
equipment; due in 1999.................................. 57,313 66,478
-------- ----------
873,657 4,732,809
Less--current portion.................................... 124,956 485,250
-------- ----------
$748,701 $4,247,559
======== ==========
</TABLE>
Future minimum lease payments as of June 30, 1996 under capitalized leases
are as follows:
<TABLE>
<S> <C>
1997.......................................................... $24,889
1998.......................................................... 24,889
1999.......................................................... 24,889
2000.......................................................... 2,815
-------
Total minimum lease payments.................................. 77,482
Less--imputed interest........................................ 11,004
-------
Present value, including current portion of approximately
$18,783...................................................... $66,478
=======
</TABLE>
Total interest expense on these leases was approximately $6,429, $1,569 and
$6,875 for the years ended June 30, 1994, 1995 and 1996, respectively.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30, SEPTEMBER 30,
----------------------- -------------
1995 1996 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Series A mandatorily redeemable
convertible preferred stock, 600,000
shares authorized, issued and
outstanding, at issuance cost plus
accumulated dividends of $1,584,780
and $1,783,980 at June 30, 1995 and
1996, respectively, and $1,833,780 at
September 30, 1996 (unaudited)....... $ 3,552,498 $ 3,751,698 $ 3,801,498
Series B mandatorily redeemable
convertible preferred stock, 600,000
shares authorized, issued and
outstanding, at issuance cost plus
accumulated dividends of $2,671,589
and $3,069,989 at June 30, 1995 and
1996, respectively, and $3,169,589 at
September 30, 1996 (unaudited)....... 6,657,979 7,056,379 7,155,979
Series C mandatorily redeemable
convertible preferred stock, 660,330
shares authorized, issued and
outstanding, at issuance cost plus
accumulated dividends of $2,377,885
and $2,878,486 at June 30, 1995 and
1996, respectively, and $3,003,642 at
September 30, 1996 (unaudited)....... 7,298,058 7,798,659 7,923,815
----------- ----------- -----------
$17,508,535 $18,606,736 $18,881,292
=========== =========== ===========
</TABLE>
F-11
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK--(CONTINUED)
Each share of Series A, Series B and Series C preferred stock is convertible
into one share of common stock at the option of the holder or automatically at
the closing of an underwritten public offering of the Company's common stock.
The preferred stockholders are entitled to a liquidation preference of $3.33
per share of Series A preferred stock, $6.67 per share of Series B preferred
stock and $7.50 per share of Series C preferred stock.
The common stock and preferred stock shall vote together as a single class.
The preferred stockholders are entitled to the number of votes equal to the
number of shares of common stock into which the shares of preferred stock can
be converted.
Dividends on the preferred stock are cumulative and accrue at a quarterly
rate of $.083 per share of Series A preferred stock, $.166 per share of Series
B preferred stock and $.1875 per share of Series C preferred stock on issued
and outstanding shares for which full payment has been received.
Dividends become payable when and if declared by the Board of Directors or
upon redemption of the preferred stock. No accrued but then unpaid dividends
shall be paid or payable upon the conversion of the preferred stock.
The Company is required to redeem all of the outstanding shares of Series A
preferred stock and Series B preferred stock on November 1, 1997 at a price of
$3.33 and $6.67 per share, respectively, plus any accrued and unpaid
dividends. In addition, the Company is required to redeem all outstanding
shares of Series C preferred stock on October 1, 1997 at a price of $7.50 per
share plus any accrued and unpaid dividends. The Company has recorded charges
of $1,099,099, $1,098,201 and $1,098,201 to accumulated deficit for the years
ended June 30, 1994, 1995 and 1996, respectively, to reflect the accretion of
preferred stock dividends.
8. COMMON STOCK
Certain shares of the Company's common stock, issued under the 1987 stock
option plan, were issued pursuant to restricted stock purchase agreements
providing the Company with a right of first refusal to repurchase any shares
offered for sale.
In connection with the issuance of the Series C redeemable convertible
preferred stock and the issuance of convertible debt, which was subsequently
retired, to stockholders in fiscal 1991, the Company issued warrants for the
purchase of 183,049 shares of common stock. The warrants are exercisable at
$1.00 per share and expire on the earlier of October 12, 1997 or the closing
of a qualified public offering, as defined in the agreement. No value was
ascribed to the warrants upon issuance as such value was considered
immaterial. All warrants previously issued were outstanding at June 30, 1994,
1995 and 1996, respectively.
In connection with the acquisition of GreenTree, the Company issued a common
stock purchase warrant for 40,000 shares of the Company's common stock at an
exercise price of $17.50 per share, which expires on November 30, 1998.
9. STOCK OPTION PLAN
In May 1987, the Company adopted a stock option plan which provides for the
granting of both incentive stock options and nonqualified options. In fiscal
1996, the Board of Directors approved an
F-12
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLAN--(CONTINUED)
additional 29,000 common shares available under the plan and also approved
that 400 common shares be made available for each new center opened, bringing
the total shares of the Company's common stock available under the plan from
358,800 to 400,000 at June 30, 1996. The option price for each incentive stock
option shall not be less than the fair market value per share of common stock
on the date of grant. The option price for each nonqualified option shall not
be less than the lesser of (i) the book value per share of common stock as of
the end of the immediately preceding fiscal year or (ii) 50% of the fair
market value per share of common stock on the date of grant. Compensation cost
for options that were granted at less than fair market value on the date of
grant was immaterial. Options under the plan become exercisable over periods
determined by the Board of Directors at a rate generally not to exceed 20% per
year beginning with the first anniversary of the date of grant. Based upon the
attainment of predetermined milestones, vesting may be accelerated for shares
granted to certain individuals as determined by the Board of Directors (see
Note 13).
The following is a summary of the stock option plan activity:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Options outstanding at June 30, 1993................... 169,101
Options granted........................................ 58,800 $ 1.25
Options terminated..................................... (9,326) $1.00- 1.25
Options exercised...................................... (3,074) $1.00- 1.25
-------
Options outstanding at June 30, 1994................... 215,501
Options granted........................................ 62,060 $1.25- 5.00
Options terminated..................................... (10,257) $1.00- 5.00
Options exercised...................................... (1,063) $1.00- 1.25
-------
Options outstanding at June 30, 1995................... 266,241
Options granted........................................ 39,480 $5.00-10.00
Options terminated..................................... (19,120) $1.00- 5.00
Options exercised...................................... (9,686) $0.50- 1.25
-------
Options outstanding at June 30, 1996................... 276,915
=======
Options exercisable at June 30, 1996................... 174,409 $0.50-$5.00
=======
</TABLE>
There were 42,656 shares available for future grant under the stock option
plan at June 30, 1996.
In the event of termination of the optionee's relationship with the Company,
options not yet exercised terminate at the earlier of sixty days or the end of
the exercise period.
In October 1995, the FASB issued Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) which provides
an alternative to APB Opinion No. 25 in accounting for stock-based
compensation in accordance with APB Opinion No. 25. The Company will present
in its annual financial statements the additional disclosures required by SFAS
123.
Interim (unaudited)
In July and September 1996, the Company granted 33,417 options at an
exercise price of $12.50 per share, 1,168 options at exercise prices ranging
from $1.00 to $6.25 were exercised and 70 options at exercise prices ranging
from $3.75 to $6.25 were cancelled. Options outstanding at September 30, 1996
totalled 309,094.
F-13
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Current:
Federal................................. $ 13,000 $ 32,000 $ 45,000
State................................... 18,000 56,000 166,000
--------- --------- -----------
31,000 88,000 211,000
--------- --------- -----------
Benefit of acquired deferred tax assets
applied to reduce goodwill............... -- -- 1,142,000
--------- --------- -----------
Deferred:
Federal................................. (312,000) (353,000) (2,159,000)
State................................... (38,000) (117,000) (199,000)
--------- --------- -----------
(350,000) (470,000) (2,358,000)
--------- --------- -----------
Income tax benefit........................ $(319,000) $(382,000) $(1,005,000)
========= ========= ===========
</TABLE>
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 1,715,000 $1,229,000
Accrued rent....................................... 166,000 643,000
Deferred revenue................................... 120,000 411,000
Bad debts.......................................... 47,000 122,000
Intangible assets.................................. -- 750,000
Other.............................................. 213,000 439,000
----------- ----------
Gross deferred tax assets............................ 2,261,000 3,594,000
Deferred tax liabilities............................. (52,000) --
Deferred tax asset valuation allowance............... (1,389,000) (416,000)
----------- ----------
Net deferred tax asset............................... $ 820,000 $3,178,000
=========== ==========
</TABLE>
The gross deferred tax assets at June 30, 1996 include $1,142,000
attributable to the acquisition of GreenTree on December 1, 1995. The deferred
tax asset valuation allowance at June 30, 1996 relates solely to the net
operating losses incurred by GreenTree before its acquisition by the Company.
These losses are subject to limitation, and may only be used to offset future
income generated by GreenTree on a separate company basis. As GreenTree has
never reported net income and is not projected to generate income on a
separate company basis, the ability to realize of this portion of the deferred
tax asset cannot be reasonably assured. The Company released a deferred tax
asset valuation allowance that was recorded at June 30, 1995 because the
Company's history of sustained profitability, and projections of continued
profitability and successful absorption of the operations of GreenTree led
management to believe that it is more likely than not that the remaining
deferred tax asset will be realized.
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax
rate to pretax income as a result of the following differences:
F-14
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1994 1995 1996
AMOUNT % AMOUNT % AMOUNT %
--------- --- ----------- --- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Taxes computed at
federal statutory
rate................. $ 281,000 34% $ 425,000 34% $ 107,000 34%
Change in valuation
allowance............ (652,000) (79) (1,000,000) (80) (2,530,000) (801)
Benefit of acquired
deferred tax assets
applied to reduce
goodwill............. -- -- -- -- 1,142,000 361
State income taxes,
net of federal
benefit.............. 52,000 6 93,000 7 210,000 66
Meals and
entertainment........ -- -- -- -- 21,000 7
Goodwill amortization. -- -- -- -- 24,000 8
Effect of state tax
rate change.......... -- -- -- -- 20,000 7
State franchise taxes. -- -- -- -- 10,000 3
Permanent differences. -- -- 34,000 3 -- --
Other................. -- -- 66,000 5 (9,000) (3)
--------- --- ----------- --- ----------- ----
Income tax benefit.. $(319,000) (39)% $ (382,000) (31)% ($1,005,000) (318)%
========= === =========== === =========== ====
</TABLE>
At June 30, 1996 the Company has federal net operating loss carryforwards of
approximately $3,400,000 which expire at various dates through 2007 and state
net operating loss carryforwards of approximately $1,388,000 which expire at
various dates through 2005. Additionally, the Company has federal alternative
minimum tax credit carryforwards of approximately $87,000 which may be used
indefinitely to reduce federal income taxes.
Subsequent ownership changes could limit the amount of net operating loss
and tax credit carryforwards that can be utilized to offset future taxable
income or tax liability in future years.
11. EMPLOYEE RETIREMENT PLAN AND INCENTIVE COMPENSATION PLAN
The Company has an employee retirement plan which meets the requirements of
Section 401(k) of the Internal Revenue Code. The plan allows employees meeting
certain requirements to contribute up to 15% of their salary. The Company will
contribute 25% of amounts contributed by employees, up to a maximum of 8% of
their salary, with a vesting period of six years. Employees are vested in
their contributions at all times. The Company also has incentive compensation
plans for certain directors and faculty of the child care centers. These
employees are rewarded financially for achieving performance milestones, as
outlined in each plan. The expense for the 401(k) plan and the incentive
compensation plan for the years ended June 30, 1994, 1995 and 1996, was
approximately $118,000, $197,603 and $381,336, respectively.
12. COMMITMENTS
The Company has noncancellable operating leases for its office and center
facilities. 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
F-15
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS--(CONTINUED)
Index at a future date. Future minimum rental commitments as of June 30, 1996
under these leases are summarized as follows:
<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
1997....................................................... $ 4,168,219
1998....................................................... 4,187,968
1999....................................................... 3,981,996
2000....................................................... 3,662,442
2001....................................................... 2,961,792
Thereafter................................................. 13,885,730
-----------
$32,848,147
===========
</TABLE>
Total rent expense was $2,145,899, $2,404,386 and $3,663,265 for the years
ended June 30, 1994, 1995 and 1996, respectively.
13. SUBSEQUENT EVENTS
1996 Equity Incentive Plan
On August 7, 1996, the Company adopted the 1996 Equity Incentive Plan which
provides for the granting of incentive stock options, nonqualified options,
stock appreciation rights and other common stock related awards.
Reverse Stock Split
On October 17, 1996, the Board of Directors authorized a 1-for-5 reverse
stock split of the Company's common stock, which will become effective prior
to the closing of the offering. All shares of common stock, common stock
options and warrants, preferred stock conversion ratios and per share amounts
included in the accompanying financial statements have been adjusted to give
retroactive effect to the reverse stock split for all periods presented.
Common and Preferred Stock
On October 17, 1996, the Board of Directors authorized an additional
9,000,000 shares of common stock, bringing the total number of common shares
authorized to 12,000,000 shares. In addition, the Board of Directors
authorized 3,000,000 shares of preferred stock that may be issued in one or
more series and as may be determined by the Board of Directors, who may
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preference and rights of the shares of
each such series and any qualifications, limitations, or restrictions thereof,
and to increase or decrease the number of shares of any such series without
any further vote or action by the stockholders. Accordingly, all share data
has been restated to reflect the additional common and preferred shares
authorized.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GreenTree Child Care Services,
Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of GreenTree Child
Care Services, Inc. at December 31, 1994 and November 30, 1995 and the results
of their operations and their cash flows for the years ended December 31, 1993
and 1994 and the eleven months ended November 30, 1995 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 audits. We conducted our
audits 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 audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 2, 1996
F-17
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 308,804 $1,839,171
Accounts receivable, trade, net of allowance for
doubtful accounts of $133,000 and $88,190, at June
30, 1994 and 1995 respectively.................... 405,968 648,215
Prepaid expenses and other current assets.......... 189,501 240,479
---------- ----------
Total current assets............................. 904,273 2,727,865
Fixed assets, net.................................... 1,526,297 2,100,116
Note receivable...................................... 66,881 --
Other intangibles, net............................... 76,250 62,500
Other assets......................................... -- 4,208
---------- ----------
$2,573,701 $4,894,689
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Payable to parent.................................. $3,986,219 $6,241,928
Note payable to parent............................. 372,000 372,000
Accounts payable and accrued expenses.............. 843,303 1,111,422
Deferred revenue................................... 53,026 118,346
---------- ----------
Total current liabilities........................ 5,254,548 7,843,696
Accrued rent......................................... 253,490 349,447
---------- ----------
5,508,038 8,193,143
---------- ----------
Stockholder's deficit:
Common stock, $.01 par value; 1,000 shares
authorized,
issued and outstanding............................ 10 10
Additional paid-in capital......................... 92,990 92,990
Accumulated deficit................................ (3,027,337) (3,391,454)
---------- ----------
Total stockholder's deficit...................... (2,934,337) (3,298,454)
---------- ----------
Commitments (Note 6)................................. -- --
---------- ----------
$2,573,701 $4,894,689
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------- ELEVEN MONTHS ENDED
1993 1994 NOVEMBER 30, 1995
----------- ------------ -------------------
<S> <C> <C> <C>
Net revenues.................. $ 7,812,591 $ 10,891,786 $13,076,925
Cost of services.............. 7,482,663 10,158,980 12,142,787
----------- ------------ -----------
Gross profit................ 329,928 732,806 934,138
Selling, general and
administrative expenses...... 915,861 1,046,527 1,268,471
----------- ------------ -----------
Loss from operations........ (585,933) (313,721) (334,333)
Interest expense, net......... (41,280) (41,280) (29,784)
----------- ------------ -----------
Net loss.................... $ (627,213) $ (355,001) $ (364,117)
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL TOTAL
NUMBER OF PAR PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES VALUE CAPITAL DEFICIT DEFICIT
--------- ----- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1993.................. 1,000 $10 $92,990 $(2,045,123) $(1,952,123)
Net loss............. -- -- -- (627,213) (627,213)
----- --- ------- ----------- -----------
Balance at December 31,
1993.................. 1,000 10 92,990 (2,672,336) (2,579,336)
Net loss............. -- -- -- (355,001) (355,001)
----- --- ------- ----------- -----------
Balance at December 31,
1994.................. 1,000 10 92,990 (3,027,337) (2,934,337)
Net loss............. -- -- -- (364,117) (364,117)
----- --- ------- ----------- -----------
Balance at November 30,
1995.................. 1,000 $10 $92,990 $(3,391,454) $(3,298,454)
===== === ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ NOVEMBER 30,
1993 1994 1995
----------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (627,213) $ (355,001) $ (364,117)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization........ 284,350 283,702 315,313
Change in assets and liabilities:
Accounts receivable, trade........... (340,930) 119,787 (242,247)
Prepaid expenses and other current
assets.............................. (107,153) 23,998 (50,978)
Note receivable...................... 9,453 11,648 66,881
Other assets......................... 4,811 4,811 (4,208)
Accounts payable and accrued
expenses............................ 186,465 203,824 268,119
Deferred revenue..................... 39,574 (974) 65,320
Accrued rent......................... 69,494 81,911 95,957
----------- ----------- ----------
Total adjustments.................. 146,064 728,707 514,157
----------- ----------- ----------
Net cash (used for) provided by
operating activities................ (481,149) 373,706 150,040
----------- ----------- ----------
Cash flows from investing activities:
Additions to fixed assets............ (691,156) (265,124) (875,382)
----------- ----------- ----------
Net cash used for investing
activities.......................... (691,156) (265,124) (875,382)
----------- ----------- ----------
Cash flows from financing activities:
Net financing from parent............ 1,238,940 33,572 2,255,709
----------- ----------- ----------
Net cash provided by financing
activities.......................... 1,238,940 33,572 2,255,709
----------- ----------- ----------
Net increase in cash and cash
equivalents......................... 66,635 142,154 1,530,367
Cash and cash equivalents, beginning of
period................................ 100,015 166,650 308,804
----------- ----------- ----------
Cash and cash equivalents, end of
period................................ $ 166,650 $ 308,804 $1,839,171
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GreenTree Child Care Services, Inc. (the "Company") was incorporated on
April 1, 1990, and is engaged in the development and management of high-
quality work-site child care centers. The following is a summary of
significant accounting policies employed by the Company in the preparation of
the accompanying financial statements.
Cash and Cash Equivalents--For purposes of the statement of cash flows, the
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Revenue Recognition--Revenues are 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
tuition payments from corporate sponsors and, to a lesser extent, by payments
from government agencies. Revenues also include management fees paid by
corporate sponsors. Indirect forms of operating support from corporate
sponsors such as reduced occupancy costs or enrollment guarantees or the
reimbursement of start-up capital expenditures are not recorded as revenue.
Tuition and management fees paid in advance are recorded as deferred revenue
and recognized when services are performed. In the management contract model,
in addition to tuition and management fee revenues, revenue is also recognized
for reimbursable expenses paid either in lieu of, or to supplement, tuitions.
Fixed Assets--Fixed assets are recorded at cost and are depreciated over
their estimated useful lives using the straight-line method. Maintenance and
repairs are expensed as incurred.
Advertising Costs--Advertising costs are expensed as incurred.
Impairment Write-downs--Impairment losses are recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. No impairment losses have occurred.
Expense Allocations--An intercompany charge was made by the former parent
company for services rendered to the Company. Items subject to such a charge
included rent, payroll and accounts payable services and other minor office
charges and were allocated on the basis of related measures such as square
footage and salary charges which management have deemed reasonable. The
intercompany charges for such services totaled $133,250 for the year ended
December 31, 1993, $124,620 for the year ended December 31, 1994 and $121,250
for the eleven months ended November 30, 1995. These expenses are charged to
general use and administrative expenses.
Income Taxes--The Company utilizes the liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 prescribes an asset
and liability approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the financial reporting and tax basis of assets and
liabilities. Deferred tax assets are recognized, net of any valuation
allowance, for the estimated future tax effects of deductible temporary
differences and tax operating loss carryforwards.
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 and
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 could differ from these estimates.
F-22
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DEPRECIABLE DECEMBER 31, NOVEMBER 30,
LIVES (YEARS) 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
Furniture and fixtures............... 10 $1,581,139 $2,114,998
Software............................. 5 313,521 399,100
Leasehold improvements............... Life of lease 159,320 349,916
Automobiles.......................... 3 13,869 13,869
---------- ----------
2,067,849 2,877,883
Less--accumulated depreciation and
amortization........................ 541,552 777,767
---------- ----------
$1,526,297 $2,100,116
========== ==========
</TABLE>
Depreciation and amortization expense related to fixed assets totaled
$269,350 and $268,702 for the years ended December 31, 1993 and 1994,
respectively and $301,563 for the period ended November 30, 1995.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Accounts payable.................................... $167,436 $ 224,538
Accrued payroll and employee benefits............... 271,742 307,088
Accrued expenses.................................... 404,125 579,796
-------- ----------
$843,303 $1,111,422
======== ==========
</TABLE>
4. BORROWINGS
The Company has a note payable to parent of $372,000 at December 31, 1994
and November 30, 1995. The note bears interest at 11%. The note and interest
is payable on demand.
The Company also maintains an intercompany current account with its parent
company. This account is non-interest bearing and is payable on demand.
F-23
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Deferred:
Federal........................................... 50,010 114,700
State............................................. 11,590 26,580
--------- -----------
61,600 141,280
Valuation allowance................................ (61,600) (141,280)
--------- -----------
Income tax provision............................... $ -- $ --
========= ===========
Deferred tax assets and liabilities are as follows:
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 463,550 416,020
Accrued expenses.................................. 255,150 360,550
Fixed assets and intangibles...................... 226,110 266,790
Other............................................. 54,790 97,520
--------- -----------
Gross deferred tax assets.......................... 999,600 1,140,880
Deferred tax asset valuation allowance............. (999,600) (1,140,880)
--------- -----------
Net deferred tax asset............................. $ -- $ --
========= ===========
</TABLE>
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax
rate to pretax income as a result of the following differences:
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, NOVEMBER 30,
1994 % 1995 %
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Taxes computed at federal statutory
rate................................ $(120,700) (34)% $(123,800) (34)%
Change in valuation allowance........ 61,600 17.4 141,280 38.8
State income taxes, net of federal
benefit............................. (17,040) (4.8) (17,480) (4.8)
Effect of forfeited net operating
loss carryforward................... 76,140 21.4 -- --
--------- ---- --------- ----
Income tax provision................. $ -- -- % $ -- -- %
========= ==== ========= ====
</TABLE>
At November 30, 1995, the Company has federal net operating loss
carryforwards of approximately $1,072,000 which expire at various dates
through 2005 and state net operating loss carryforwards of approximately
$1,161,000 which expire at various dates through 2007.
Subsequent ownership changes could limit the amount of net operating loss
and tax credit carryforwards that can be utilized to offset future taxable
income or tax liability in future years.
F-24
<PAGE>
GREENTREE CHILD CARE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS
The Company has noncancellable operating leases for its office and center
facilities. 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. Future minimum rental commitments as of November 30, 1995 under
these leases are summarized as follows:
<TABLE>
<S> <C>
1996........................................................ $1,121,331
1997........................................................ 1,163,911
1998........................................................ 1,183,106
1999........................................................ 1,201,593
2000........................................................ 1,106,085
Thereafter.................................................. 1,830,292
----------
$7,606,318
==========
</TABLE>
Total rent expense was $1,136,306 and $1,356,415 for the years ended
December 31, 1993 and 1994, respectively and $1,450,271 for the period ended
November 30, 1995.
7. SUBSEQUENT EVENT
The ServiceMaster Company, L.P. (the owner of the Company) sold the Company
to Bright Horizons Children's Centers, Inc. effective December 1, 1995.
F-25
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined statement of operations for the fiscal year
ended June 30, 1996 gives effect to the GreenTree acquisition as if it had
occurred on July 1, 1995. The pro forma combined financial data has been
prepared by management and should be read in conjunction with the notes
included herewith, the Company's Consolidated Financial Statements,
GreenTree's Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The pro forma combined
financial data do not purport to represent what the Company's results of
operations actually would have been had such transactions and events occurred
on the dates specified, or to project the Company's results of operations for
any future period or date. The pro forma adjustments are based upon available
information and certain adjustments that management believes are reasonable.
In the opinion of management, all adjustments have been made that are
necessary to present fairly the pro forma data.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
BRIGHT HISTORICAL PRO FORMA PRO FORMA
HORIZONS(A) GREENTREE(B) ADJUSTMENTS COMBINED
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net revenues................... $64,181 $6,260 $ -- $70,441
Cost of services. 55,615 6,014 -- 61,629
------- ------ ----- -------
Gross profit................. 8,566 246 -- 8,812
Selling, general and
administrative expenses........ 6,376 448 49(c) 6,873
Amortization of noncompete
agreements..................... 1,680 -- -- 1,680
------- ------ ----- -------
Income (loss) from
operations.................. 510 (202) (49) 259
Interest income (expense), net. (194) (17) (103)(d) (314)
------- ------ ----- -------
Income (loss) before income
taxes....................... 316 (219) (152) (55)
Income tax benefit (provision). 1,005 (3) 41(e) 1,043
------- ------ ----- -------
Net income (loss)............ $ 1,321 $ (222) $(111) $ 988
======= ====== ===== =======
Net income per share(f)........ $ 0.51 $ 0.38
======= =======
Weighted average number of
common
and common equivalent
shares(f)..................... 2,597 2,597
======= =======
</TABLE>
- --------
(a) Includes results for GreenTree after its acquisition on December 1, 1995.
(b) Includes the five-month period of GreenTree results from July 1, 1995 to
November 30, 1995 prior to its acquisition by Bright Horizons.
(c) Represents five months of additional expenses for the amortization of
intangible assets and liabilities, including goodwill, contract rights and
unfavorable leases acquired by Bright Horizons in the GreenTree
acquisition as if the acquisition had occurred on July 1, 1995, using the
straight line method over the estimated period of benefit. The amount is
comprised of $49,000 goodwill, $42,000 contract rights and $42,000 lease
losses, which are being amortized of a period of 25 years, 10 years and 10
years, respectively.
(d) Represents five additional months of interest expense using the applicable
interest rate on the note to ServiceMaster and amounts drawn on the
Company's revolving line of credit to finance the GreenTree acquisition as
if the acquisition had occurred on July 1, 1995. The acquisition was
financed by a promissory note to ServiceMaster for $3 million and
borrowings under a revolving line of credit for $2 million, both at an
interest rate of 8.25%, which is variable based upon prime rate. However,
the revolving line of credit was substantially paid off within 4 months
subsequent to December 1, 1995. Therefore, assuming the Company would pay
off the line of credit in the same period of time subsequent to July 1,
1995, no adjustment is required, as the historical Bright Horizons'
amounts include such interest expense.
(e) Reflects the tax benefit on interest expense using an assumed tax rate of
40%.
(f) Calculated on the basis described in Note 1 to Consolidated Financial
Statements.
F-26
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, TO ANY PERSON IN ANY JURISDICTION WHERE AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Financial and Operating Data..................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 24
Management................................................................ 35
Principal and Selling Stockholders........................................ 39
Certain Transactions...................................................... 41
Description of Capital Stock.............................................. 42
Shares Eligible for Future Sale........................................... 43
Underwriting.............................................................. 46
Validity of Common Stock.................................................. 47
Experts................................................................... 47
Additional Information.................................................... 47
Index to Consolidated Financial Statements................................ F-1
</TABLE>
-----------
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
BRIGHT HORIZONS
CHILDREN'S CENTERS, INC.
Common Stock
-----------
PROSPECTUS
-----------
Alex. Brown & Sons
INCORPORATED
EVEREN Securities, Inc.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates,
except the Securities and Exchange Commission registration fee and the
National Association of Securities Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
SEC Registration Fee............................................. $ 8,712.12
NASD Filing Fee.................................................. 2,800
Nasdaq National Market Listing Fee...............................
Blue Sky Fees and Expenses....................................... 5,000
Transfer Agent and Registrar Fees................................
Accounting Fees and Expenses.....................................
Legal Fees and Expenses..........................................
Printing Expenses................................................
Miscellaneous....................................................
----------
Total.......................................................... $
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation provides
that the Registrant's Directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the exculpation from liabilities is not permitted
under the Delaware General Corporation Law as in effect at the time such
liability is determined. The Amended and Restated By-Laws provide that the
Registrant shall indemnify its directors to the full extent permitted by the
laws of the State of Delaware.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Registrant has issued the following securities which were not registered under
the Securities Act of 1933, as amended (the "Securities Act"):
On December 1, 1995, in connection with the acquisition of all the issued
and outstanding stock of GreenTree from ServiceMaster, the Company issued a
Promissory Note in the aggregate principal amount of $3.0 million and warrants
to purchase 40,000 shares of the Company's Common Stock at an exercise price
of $17.50 per share.
The Company also issued options under its 1987 Stock Option Plan to purchase
158,744 shares of the Company's Common Stock at a weighted average exercise
price of $6.45. Of these, 13,658 shares have been issued upon exercise of such
options.
The securities issued pursuant to the paragraphs above were issued in
reliance on the exemption from registration under Section 4(2) of the
Securities Act or Regulation D thereunder as a transaction not involving a
public offering or pursuant to Rule 701 promulgated under the Securities Act.
All of the foregoing securities are deemed restricted securities for purposes
of the Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is a list of exhibits filed as a part of this registration
statement.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1* -- Form of Underwriting Agreement
3.1* -- Amended and Restated Certificate of Incorporation (to be filed
prior to the closing of the offering)
3.2+ -- Amended and Restated By-Laws of the Company
4.1 -- Specimen Certificate for Common Stock
4.2+ -- Purchase Agreement dated October 12, 1990 among the Company and
certain Investors named therein
5* -- Opinion of Ropes & Gray
10.1+ -- 1987 Stock Option and Incentive Plan
10.2+ -- 1996 Equity Incentive Plan
10.3 -- Purchase Agreement dated December 1, 1995 by and between the
Company and The ServiceMaster Company.
21 -- Subsidiaries
23.1* -- Consent of Ropes & Gray (included in Exhibit 5)
23.2 -- Consent of Price Waterhouse LLP
24+ -- Power of Attorney
27 -- Financial Data Schedule
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
(b) The following Financial Statement Schedules of the Registrant for the
Three Years Ended June 30, 1996 are included in this Registration Statement:
Schedule II - Valuation and Qualiifying Accounts of Bright Horizons
Children's Centers, Inc. for the three years ended June 30, 1995. All other
schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
(a)Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(b)The undersigned Registrant hereby undertakes that:
(1)It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as requested by the Underwriters to permit prompt delivery to
each purchaser.
II-2
<PAGE>
(2)For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3)For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cambridge, MA on this 13th day of December, 1996.
Bright Horizons Children's Centers,
Inc.
By:
*
------------------------------------
ROGER H. BROWN
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chairman of the
* Board and Chief December 13,
- ------------------------------------ Executive Officer 1996
ROGER H. BROWN (Principal
Executive Officer)
Chief Financial
* Officer, Secretary December 13,
- ------------------------------------ and Treasurer 1996
STEPHEN I. DREIER (Principal
Financial Officer
and Principal
Accounting
Officer)
Director
* December 13,
- ------------------------------------ 1996
JOSHUA BEKENSTEIN
Director
* December 13,
- ------------------------------------ 1996
ROBERT S. BENSON
Director
* December 13,
- ------------------------------------ 1996
JOHN M. REYNOLDS
Director
* December 13,
- ------------------------------------ 1996
SARA LAWRENCE-LIGHTFOOT
II-4
<PAGE>
SIGNATURE TITLE DATE
Director
* December 13,
- ------------------------------------- 1996
ERNEST C. PARIZEAU
Director
* December 13,
- ------------------------------------- 1996
LINDA A. MASON
*By: /s/ Roger H. Brown
---------------------------------
ROGER H. BROWN, POWER OF ATTORNEY
II-5
<PAGE>
SCHEDULE II
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE
BEGINNING TO COSTS AND TO OTHER AND AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) WRITE-OFFS PERIOD
- ----------- ---------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year ended June 30,
1994................. $ 60,000 $69,821 $ 0 $ (50,821) $ 79,000
Year ended June 30,
1995................. 79,000 72,177 0 (39,541) 111,636
Year ended June 30,
1996................. 111,636 95,854 165,996 (66,028) 307,458
Deferred tax asset
valuation allowance
Year ended June 30,
1994................. $3,041,000 $ 0 $ 0 $ (652,000) $2,389,000
Year ended June 30,
1995................. 2,389,000 0 0 (1,000,000) 1,389,000
Year ended June 30,
1996................. 1,389,000 0 1,557,000 (2,530,000) 416,000
</TABLE>
- --------
(1) Amounts were acquired from the acquisition of GreenTree Child Care
Services, Inc.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1* -- Form of Underwriting Agreement
3.1* -- Amended and Restated Certificate of Incorporation
3.2+ -- Amended and Restated By-Laws of the Company
4.1 -- Specimen Certificate for Common Stock
4.2+ -- Purchase Agreement dated October 12, 1990 among the Company and
certain Investors named therein
5* -- Opinion of Ropes & Gray
10.1+ -- 1987 Stock Option and Incentive Plan
10.2+ -- 1996 Equity Incentive Plan
10.3 -- Purchase Agreement dated December 1, 1995 by and between the
Company and The ServiceMaster Company.
21 -- Subsidiaries
23.1* -- Consent of Ropes & Gray (included in Exhibit 5)
23.2 -- Consent of Price Waterhouse LLP
24+ -- Power of Attorney
27 -- Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 4.1
- --------------------------------------------------------------------------------
COMMON STOCK COMMON STOCK
[LOGO APPEARS HERE] [LOGO APPEARS HERE] [LOGO APPEARS HERE]
THIS CERTIFICATE IS INCORPORATED UNDER THE SEE REVERSE FOR
TRANSFERABLE IN HARTFORD, LAWS OF THE STATE OF CERTAIN DEFINITIONS
CT AND NEW YORK,NY DELAWARE
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY-PAID NON-ASSESSABLE SHARES OF THE PAR VALUE OF ONE CENT ($.01) EACH
OF THE COMMON STOCK OF
BRIGHT HORIZONS CHILDREN'S CENTERS, INC., transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to the laws of the State
of Delaware and the Certificate of Incorporation and the By-Laws of the
Corporation, as the same may be from time to time amended, to all of which the
holiday by acceptance hereof assents. This certificate is not valid unless
countersigned by the Transfer Agent and Registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Stephen Dreier [SEAL] /s/ Linda A. Mason
------------------------- -------------------------
TREASURER PRESIDENT
COUNTERSIGNED AND REGISTERED:
FLEET NATIONAL BANK
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
- --------------------------------------------------------------------------------
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
The Corporation has more than one class of stock authorized to be issued.
The Corporation will furnish without charge to each stockholder upon request a
copy of the full text of the powers, designations, preferences and relative,
participating, optional or other rights of the shares of each class of stock
(and any series thereof) authorized to be issued by the Corporation and the
qualifications, limitations or restrictions of such preferences and/or rights,
all as set forth in the Certificate of Incorporation and amendments thereto
filed with the Secretary of State of the state of Delaware.
The following abbreviations, when used in the inscription of the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ........... Custodian ............
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with rights Under Uniform Gifts to Minors
of survivorship and not as
tenants in common Act ........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _____________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
__________________________________________________________________ Attorney to
transfer the said stock on the books of the within-names Corporation with full
power of substitution in the premises.
Dated ___________________________________
_______________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed:
By
- ---------------------------------------------
THE SIGNATURES(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.3
PURCHASE AGREEMENT
This Purchase Agreement is made and entered into as of this 1st day of
December, 1995, by and between THE SERVICEMASTER COMPANY, a Delaware limited
partnership with its principal place of business in Downers Grove, Illinois
("ServiceMaster"), and BRIGHT HORIZONS CHILDREN'S CENTERS, INC., a Delaware
corporation with its principal place of business in Cambridge, Massachusetts
("Bright Horizons").
RECITALS:
A. ServiceMaster Child Care Services, Inc., a Delaware corporation
with its principal place of business in Downers Grove, Illinois
("GreenTree"), is engaged in the business of providing child care services
under the name "GreenTree Child Care";
B. ServiceMaster owns all of the issued and outstanding shares of
capital stock of GreenTree;
C. ServiceMaster is the lessee under certain real property leases for
facilities used by GreenTree in its Child Care Business (the "ServiceMaster
Leases");
D. ServiceMaster is a party to certain management agreements pursuant
to which GreenTree provides child care management services (the
"ServiceMaster Service Agreements");
E. The ServiceMaster Leases and the ServiceMaster Service Agreement
are collectively referred to herein as the "ServiceMaster Contracts"; and
F. ServiceMaster desires to sell to Bright Horizons, and Bright
Horizons desires to purchase from ServiceMaster, subject to the terms and
conditions set forth herein, all of the ServiceMaster Contracts and all of
such shares.
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein and in the Exhibits and the Schedules hereto, the parties agree as
follows:
2. DEFINITIONS
In this Agreement (as hereinafter defined), the following terms and
expressions shall have the indicated meanings (such meanings to be equally
applicable to the singular and plural forms of such words and expressions):
<PAGE>
"Accounting Principles" shall mean the accounting principles that have been
previously consistently applied by GreenTree, such principles being in
accordance with United States generally accepted accounting principles except as
otherwise stated in Schedule 2-1.
"Agreement" means this Purchase Agreement, including all schedules and
exhibits hereto.
"Child Care Business" means the business of providing child care services.
"Closing" means the closing of the sale and the purchase of the Shares in
accordance with Section 4 hereof.
"Closing Balance Sheet" shall have the meaning set forth in Section 7.7(c).
"Closing Date" means December 6, 1995 or such other date to which the
parties may agree in writing.
"Confidential Information" means any and all information of any kind or
nature whatsoever, whether written or oral, including, without limitation,
financial information, trade secrets, client, customer or supplier lists and
other proprietary business information regarding Bright Horizons, ServiceMaster
or GreenTree, which information is not known to the general public or to persons
unaffiliated with Bright Horizons, ServiceMaster or GreenTree, as the case may
be.
"Employment and Pension Agreements" shall have the meaning set forth in
Section 7.24.
"Financial Statements for 1994" means, collectively, the balance sheet and
profit and loss account of GreenTree as of December 31, 1994, prepared in
accordance with the Accounting Principles consistently applied and audited by
the external auditors of ServiceMaster as part of their audit of the financial
statements of ServiceMaster Limited Partnership for the year ended December 31,
1994.
"Indemnifiable Losses" shall have the meaning set forth in Section 12.4(a).
"Intellectual Property" shall have the meaning set forth in Section
7.16(b).
"Key Employees" means the persons listed in Schedule 2-2.
-------------
"Liens" means any lien, security interest, charge, mortgage or other
similar claims or rights of third parties.
"Losses" shall have the meaning set forth in Section 12.4(a).
-2-
<PAGE>
"Material Adverse Effect" means a material adverse effect on the business,
prospects, operations, financial or other condition of GreenTree, taken as a
whole.
"Most Recent Interim Financial Statements" means, collectively, the
unaudited balance sheet and profit and loss account of GreenTree (together with
the notes thereto), as of October 31, 1995 prepared in accordance with the
Accounting Principles, and certified by ServiceMaster's chief financial officer
(whose certification may include the next sentence of this paragraph). The Most
Recent Interim Financial Statements are subject to normal year-end adjustments
(which will not be material individually or in the aggregate).
"Nominal Losses" shall have the meaning set forth in Section 13.4(a).
"Note" shall have the meaning set forth in Section 3.2
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Personal Property" means all items of property, assets and equipment owned
or used by GreenTree, including, without limitation, inventory, office equipment
and all other types of equipment used in the conduct of the business of
GreenTree.
"Purchase Price" shall have the meaning set forth in Section 3.2.
"Purchase Price Allocation" means the allocation of the Purchase Price as
set forth in Exhibit A-1.
"Shares" means the 1,000 shares of common stock, par value $0.01 per share,
of GreenTree.
"Tax" and "Taxes" mean any federal, state or local: income tax; gross
receipts tax; license fee or tax; payroll tax; employment tax; excise tax;
value added tax; severance tax; stamp tax; occupation tax; capital stock tax;
franchise tax; profits tax; withholding tax; social security tax; unemployment
tax; disability tax; real or personal property tax; sales or use tax; transfer
registration fee or tax; alternative or add-on minimum tax; or any other tax of
any kind whatsoever. The term includes any interest, penalty or addition to a
base amount.
"Warrant" shall have the meaning set forth in Section 3.3.
"Working Capital Adjustment" shall have the meaning set forth in Section
3.6(d).
-3-
<PAGE>
3. PURCHASE AND SALE OF THE SERVICEMASTER CONTRACTS AND THE SHARES; PURCHASE
PRICE; PURCHASE PRICE ADJUSTMENTS
3.1 Basic Transaction. On and subject to the terms and conditions of this
-----------------
Agreement, ServiceMaster hereby agrees to sell to Bright Horizons at the
Closing, and Bright Horizons agrees to purchase from ServiceMaster at the
Closing, for the consideration specified in Sections 3.2 and 3.3, --
(i) all of the ServiceMaster Contracts listed on Schedule 5.2(a) hereto;
---------------
and
(ii) all of the Shares.
3.2 Purchase Price.
--------------
(a) Bright Horizons agrees that at the Closing it will pay to
ServiceMaster the sum of Six Million Dollars ($6,000,000) (the "Purchase Price")
by delivery of (x) a promissory note in the form of Exhibit A in the principal
amount of $3,000,000 (the "Note") and (y) cash for the balance of the Purchase
Price by wire transfer or delivery of otherwise immediately available funds. The
Purchase Price shall be adjusted as provided in Sections 3.4 - 3.6.
(b) The Purchase Price shall be allocated among the ServiceMaster
Contracts, the Shares and the agreement not to compete which is set forth in
Section 10 of this Agreement in accordance with the Purchase Price Allocation.
3.3 Warrant. In addition to the payment of the Purchase Price at the
-------
Closing, Bright Horizons will deliver to ServiceMaster a common stock purchase
warrant which shall entitle the holder to purchase 200,000 shares of common
stock of Bright Horizons at $3.50 per share and which shall otherwise be in the
form of Exhibit B (the "Warrant").
3.4 [This Section intentionally left blank.]
3.5 Purchase Price Adjustment: Start-Up Equipment and Start-Up Costs.
----------------------------------------------------------------
(a) Bright Horizons agrees to reimburse ServiceMaster for the
ServiceMaster's expenditures in excess of $20,000 for start-up services, startup
supplies, furniture and fixtures and startup equipment in connection with the
seven centers listed on Schedule 3.5(a) hereto. The amount of such reimbursement
shall be the amount shown in Schedule 3.5(a) increased for any amounts paid by
ServiceMaster in November 1995 except for items in those categories which are
shown as frozen in Schedule 3.5(a).
(b) In no event shall any reimbursement made under this Section 3.5 exceed
$800,000.
-4-
<PAGE>
(c) Any reimbursement due from Bright Horizons under this Section 3.5
shall be made by way of an addition to the cash portion of the Purchase Price.
3.6 Purchase Price Adjustment: Unopened Centers. In the event that less
-------------------------------------------
than four of the seven proposed child care centers listed on Schedule 3.6 have
------------
not become fully operational prior to December 31, 1996 there shall be a
purchase price reduction in an amount equal to (x) $100,000 multiplied by (y)
the number by which the number of opened centers is less than four; provided
--------
however, that any such center which does not become fully operational as a
- -------
result of a change in the economic substance of the proposal pursuant to which
such center is currently proposed to be opened (where such change has been
requested or adopted by Bright Horizons and has the effect of making such
proposal less favorable economically to the person to whom such proposal has
been presented) shall be deemed to have become fully operational for the
purposes of this Section 3.6.
3.7 Purchase Price Adjustments: Closing Balance Sheet; Statement of
-------------------------- ------------------------------------
Working Capital.
- ---------------
(a) Closing Balance Sheet; Post-Closing Adjustments. (a) As soon as
-----------------------------------------------
practicable but in any event no later than December 31, 1995, Bright Horizons
shall prepare and deliver to ServiceMaster a balance sheet for GreenTree as of
November 30, 1995 (the "Closing Balance Sheet") which shall be certified as true
and correct by the chief financial officer of Bright Horizons. Except as set
forth below, the Closing Balance Sheet shall be prepared in accordance with the
United States general accounting principles and shall include the following
provisions and no others:
Current Assets:
(1) a provision for the actual amount of assets relating to cash
which, amount shall be zero;
(2) a provision for the actual amount of assets relating to
accounts receivable (net of an allowance for doubtful
accounts);
(3) a provision for the actual amount of assets relating to
accounts receivable consulting (net of an allowance for
doubtful accounts) and not including any consulting receivable
relating to periods after November 1, 1995;
(4) a provision for the actual amount of assets relating to draw-
open;
(5) a provision for the actual amount of assets relating to pre-
paid insurance general liability;
(6) a provision for the actual amount of assets relating to pre-
paid expense miscellaneous (which provision shall not include
any assets relating to
-5-
<PAGE>
bonuses or other employee compensation and shall not include
any prepaid expenses relating to equipment, supplies or start-
up expenses);
(7) a provision for the actual amount of assets relating to pre-
paid rent;
Current Liabilities:
(8) a provision for the actual amount of liabilities for accounts
payable, which amount shall be zero;
(8)(a) a provision for a liability of not more than $134,000 for
renovations of the Cigna center and for start-up costs at the
Motorola, Schaumberg and Cigna centers;
(9) a provision for the actual amount of liabilities for accrued
payroll, taxes and benefits;
(10) a provision for the actual amount of liabilities for accrued
real estate tax;
(11) a provision for the actual amount of liabilities for accrued
bonuses, which amount shall be zero, it being understood that
ServiceMaster will pay for bonuses or that portion of bonuses
due to any GreenTree employees for services rendered prior to
the Closing Date;
(12) a provision for the actual amount of liabilities for accrued
miscellaneous expenses;
(13) a provision for the actual amount of liabilities for deferred
revenue;
(14) a provision for liabilities for parent deposits in the amount
of $285,348, a breakdown of which appears in Schedule
3.7(a)(14), as adjusted through November 30, 1995 with respect
to the first ten centers listed in such schedule;
(15) a provision for the actual amount of liabilities for consulting
services, which amount shall be zero;
(16) a provision for the actual amount of liabilities for slot
reservations, which amount shall be zero;
(17) a provision for liabilities for accrued employee vacation time
in the amount of $213,409;
-6-
<PAGE>
(18) a provision for liabilities for parent vacation time in the
amount of $117,208;
(19) a provision for the actual amount of liabilities for the
current portion of any capitalized leases, which amount shall
be zero;
(20) a provision for the actual amount of current liabilities for
Taxes, which amount shall be zero; and
(21) a provision for liabilities for free rent calculated in
accordance with FASB 13 in the amount of $220,593.
(b) If ServiceMaster has no objections to the Closing Balance Sheet
prepared and delivered by Bright Horizons pursuant to Section 3.7(a), it shall
so notify Bright Horizons and the Closing Balance Sheet shall become final on
the date ServiceMaster provides such notice. If ServiceMaster has any objections
to the Closing Balance Sheet delivered by Bright Horizons, it shall deliver to
Bright Horizons a detailed statement describing its objections within 10 days
after receiving the Closing Balance Sheet. The Closing Balance Sheet shall also
become final if ServiceMaster fails to provide such notice. During such 10 day
period ServiceMaster shall be permitted to have access to, examine and make
copies of all books and records of GreenTree and shall have such access to the
personnel of GreenTree and Bright Horizons as may be reasonably necessary to
permit ServiceMaster to review the manner in which the Closing Balance Sheet was
prepared. If ServiceMaster's objections to the Closing Balance Sheet cannot be
resolved within 10 days following ServiceMaster's delivery of its notice of
objection, an independent auditor (the "independent auditor"), mutually
acceptable by the parties hereto, shall be retained to resolve all remaining
objections. Any determination shall be made by the independent auditor on the
basis of such procedures as it, in its sole discretion, deems appropriate and
expeditious, taking into account the procedures set forth in Section 3.7(a), the
nature of the issues, the amounts in dispute and the positions asserted by the
parties. The parties may submit to the independent auditor any fact or
materials which they deem relevant to the determination. The determination of
the independent auditor will be set forth in writing and will be conclusive,
nonappealable and binding upon the parties hereto for all purposes.
(c) In the event the parties submit any unresolved objections to the
independent auditor for resolution as provided in Section 3.7(b) above,
ServiceMaster and Bright Horizons shall each bear equal responsibility for the
fees and expenses of the independent auditor.
(d) Once the Closing Balance Sheet has been agreed to by the parties or
has been finally determined by the independent auditor, the following
adjustments to the Purchase Price shall be made. The "Working Capital
Adjustment" shall be calculated and shall equal the sum of the current assets
minus the sum of the current liabilities of Green Tree as of the Closing, as
reflected on the Closing Balance Sheet. If the Working Capital Adjustment is
positive, the Purchase Price shall be increased by such amount. If the Working
Capital Adjustment is negative, the Purchase Price shall be reduced
-7-
<PAGE>
by such amount. The amount of any such Purchase Price increase or Purchase Price
decrease shall be payable by the party owing such amount within 10 days after
the final determination of the Closing Balance Sheet by wire transfer or
delivery of otherwise immediately available funds, provided, however, that in
the event Bright Horizons is entitled to a purchase price reduction as a result
of the determination of the Closing Balance Sheet, Bright Horizons, at its
election, shall be entitled to offset an amount equal to the amount of such
Purchase Price reduction from any payment due to ServiceMaster pursuant to the
Note.
3.8 Payment of Purchase Price Reduction(s). Any Purchase Price reduction
--------------------------------------
shall be payable by ServiceMaster in cash, bank check or wire transfer of
immediately available funds within 10 days after the determination that such
Purchase Price Reduction is payable to Bright Horizons, provided, however, that
Bright Horizons, at its elections, shall be entitled to offset the amount of any
Purchase Price Reduction from the next payment due to ServiceMaster under the
Note.
3.9 Changes in Purchase Price Allocation as a Result of Purchase Price
------------------------------------------------------------------
Adjustments. In the event of any Purchase Price increase or any Purchase Price
- -----------
decrease, the Purchase Price Allocation shall be adjusted as determined by
Bright Horizons to reflect such changes by increasing or decreasing, as the case
may be, the amount of the Purchase Price allocated to items other than the non-
competition agreement.
4. CLOSING
4.1 Time and Place of Closing; Effective Date of the Transaction. The
------------------------------------------------------------
Closing shall take place on the Closing Date at the executive offices of
ServiceMaster at One ServiceMaster Way, Downers Grove, Illinois at 1:00 p.m.
Central Standard Time. However, the effective time of the closing of the
transactions contemplated by this Agreement shall be the close of business on
November 30, 1995.
4.2 Closing Deliveries. At the Closing, subject to the satisfaction or
------------------
waiver of the obligations set forth in Section 11 hereof, the parties will make
the following deliveries --
(a) ServiceMaster shall deliver to Bright Horizons the various
certificates, instruments and documents referred to in Section
11.1;
(b) Bright Horizons shall deliver to ServiceMaster the various
certificates, instruments and documents referred to in Section
11.2;
(c) Subject to Section 11A, ServiceMaster shall deliver to Bright
Horizons duly executed assignments of all of the ServiceMaster
Contracts (which, in the case of the assignments of the
ServiceMaster Leases, shall be in recordable
-8-
<PAGE>
form) together with any required consents in respect thereof or
as require under any lease or agreement to which GreenTree is a
party;
(d) ServiceMaster shall deliver to Bright Horizons the stock
certificate(s) for the Shares, duly assigned to Bright Horizons;
and
(e) Bright Horizons shall pay and deliver to ServiceMaster the
consideration specified in Sections 3.2 and 3.3.
4.3 Documents and Procedures Regarding Change in Name. As part of the
-------------------------------------------------
Closing, Bright Horizons shall deliver to ServiceMaster the following documents:
(a) A consent instrument executed by all of the new directors of
GreenTree which shall provide for a change in the corporate name
of GreenTree to a name which does not contain the name
"ServiceMaster" or any derivative thereof. Such consent
instrument shall be substantially in the form of Exhibit B-1.
(b) A duly executed amendment of the Certificate of Incorporation of
GreenTree in a form ready for filing with the Secretary of State
of Delaware which provides for the change in name referred to in
paragraph (a) above. Such amendment shall be in substantially the
form attached hereto as Exhibit B-2.
(c) Duly executed certificates suitable for filing in each state in
which GreenTree is presently qualified to do business which will
give effect to GreenTree's change in name as soon as such change
in name has been effected in Delaware.
As promptly as practicable after the Closing, ServiceMaster shall, at its
expense and as agent for GreenTree, file and record the documents referred to in
paragraphs (b) and (c) above.
5. REPRESENTATIONS AND WARRANTIES OF
SERVICEMASTER CONCERNING THE TRANSACTION
ServiceMaster represents and warrants to Bright Horizons that the
statements made in this Section 5 are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date as though
then made:
5.1 Organization; Power; Authorization.
----------------------------------
-9-
<PAGE>
(a) ServiceMaster is duly organized, validly existing and in good standing
as a limited partnership under the laws of the State of Delaware.
(b) ServiceMaster has all requisite partnership and other power and
authority to execute and deliver this Agreement and to execute and deliver each
other agreement or document to be delivered in connection herewith and to
consummate the transactions contemplated by this Agreement (including, but not
limited to, the assignment of the Shares and the assignments of the
ServiceMaster Contracts).
(c) This Agreement and each other document delivered in connection
herewith by ServiceMaster has been duly and validly authorized, executed and
delivered by ServiceMaster and constitutes a valid, legal and binding obligation
of ServiceMaster, enforceable against ServiceMaster in accordance with its
terms.
(d) ServiceMaster need not give notice to, make any filing with, or obtain
any authorization, consent or approval of, any government or governmental agency
in order to consummate the transactions contemplated by this Agreement.
5.2 ServiceMaster Leases.
--------------------
(a) The ServiceMaster Leases are listed and described in reasonable detail
in Schedule 5.2(a).
---------------
(b) ServiceMaster has delivered to Bright Horizons correct and complete
copies of the signed ServiceMaster Leases including all amendments, side letters
and estoppel letters relating thereto, if any.
(c) ServiceMaster had, and continues to have, all partnership power and
authority to enter into each of the ServiceMaster Leases.
(d) With respect to each of the properties listed in Schedule 5.2(a),
(1) the lease is legal, valid, binding and enforceable in full force
and effect;
(2) subject to any required consents, the lease or sublease will
continue to be legal, valid, binding, enforceable and in full
force and effect on identical terms following the consummation of
the transactions contemplated by this Agreement;
(3) subject to any required consents, no party to the lease is in
breach or default, and no event has occurred which, with notice
or lapse of time (or both), would constitute a breach or default
or permit termination, modification or acceleration thereunder;
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<PAGE>
(4) no party to the lease has repudiated any provision thereof;
(5) there are no disputes, oral agreements or forbearance programs in
effect as to the lease;
(6) none of the ServiceMaster Leases is a sublease;
(7) no property listed in Schedule 5.2(a) is being used by GreenTree
in violation of any applicable zoning, building, or environmental
protection code after receipt of a notice of such violation which
was addressed to either ServiceMaster or GreenTree or otherwise
brought to the attention of either of them by the lessor or other
third party;
(8) no property listed in Schedule 7.13(a) is being used by GreenTree
in violation of any licensing law or regulation;
(9) ServiceMaster has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold
unless the fact that GreenTree is in possession of the leased
premises and uses the leased premises in connection with
GreenTree's Child Care Business effectively creates a sublease or
other form of property interest from ServiceMaster to GreenTree;
(10) there are no parties other than GreenTree in possession of any
parcel of real property listed in Schedule 5.2(a); and
(11) all facilities located on each parcel of real property listed in
Schedule 5.2(a) are supplied with the utilities and other
services necessary for the operation of such facilities.
5.3 ServiceMaster Service Agreements
--------------------------------
(a) The ServiceMaster Service Agreements are listed and described in
reasonable detail in Schedule 5.3(a).
---------------
(b) ServiceMaster has delivered to Bright Horizons correct and complete
copies of the ServiceMaster Service Agreements.
(c) ServiceMaster had, and continues to have, all partnership power and
authority to enter into each of the ServiceMaster Service Agreements.
(d) With respect to each ServiceMaster Service Agreement listed in
Schedule 5.3(a),
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<PAGE>
(1) the party actually rendering the services required by such
Service Agreement is GreenTree and such ServiceMaster Service
Agreement is the document under which GreenTree occupies and uses
the premises described in such ServiceMaster Service Agreement;
(2) such ServiceMaster Service Agreement is legal, valid, binding and
enforceable in full force and effect;
(3) subject to any required consents, such ServiceMaster Service
Agreement will continue to be legal, valid, binding, enforceable
and in full force and effect on identical terms following the
consummation of the transactions contemplated by this Agreement;
(4) subject to any required consents, no party to such ServiceMaster
Service Agreement is in breach or default, and no event has
occurred which, with notice or lapse of time (or both), would
constitute a breach or default or permit termination,
modification or acceleration thereunder;
(5) no party to such ServiceMaster Service Agreement has repudiated
any provision thereof;
(6) there are no disputes, oral agreements or forbearance programs in
effect as to such ServiceMaster Service Agreement;
(7) no property used by GreenTree under any ServiceMaster Service
Agreement listed in Schedule 5.3(a) is being used by GreenTree in
violation of any applicable zoning, building, or environmental
protection code after receipt of a notice of such violation which
was addressed to either ServiceMaster or GreenTree or otherwise
brought to the attention of either of them by the lessor or other
third party;
(8) no property used by GreenTree under any ServiceMaster Service
Agreement which is listed in Schedule 5.3(a) is being used by
GreenTree in violation of any licensing law or regulation;
(9) ServiceMaster has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the premises
described in any ServiceMaster Service Agreement unless the fact
that GreenTree is in possession of the premises and uses the
leased premises in connection with GreenTree's Child Care
Business effectively creates a lease or other form of property
interest from ServiceMaster to GreenTree;
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<PAGE>
(10) there are no parties other than GreenTree in possession of any
parcel of real property listed in Schedule 5.3(a); and
(11) all facilities located on each parcel of real property listed in
Schedule 5.3(a) are supplied with the utilities and other
services necessary for the operation of such facilities.
5.4 ServiceMaster Contracts. Each of the ServiceMaster Contracts is
-----------------------
legal, valid, binding, enforceable and in full force and effect on the date
hereof and, unless otherwise stated in Schedules 5.2(a) and 5.3(a), will
---------------------------
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the Closing.
5.5 ServiceMaster's Title to the Shares.
-----------------------------------
(a) ServiceMaster holds of record, owns and has good and marketable title
to the Shares, free and clear of any restrictions on transfer and any Liens.
(b) There are no outstanding obligations, options, first refusal rights or
the like under contracts or agreements to which ServiceMaster, GreenTree or any
affiliate of either ServiceMaster or GreenTree is bound which affect
ServiceMaster's transfer of the Shares hereunder.
(c) Upon the delivery by ServiceMaster to Bright Horizons of the
certificates for the Shares and payment by Bright Horizons to ServiceMaster of
the consideration specified in Sections 3.2 and 3.3, Bright Horizons shall
acquire good and marketable title to the Shares, free and clear of any and all
Liens (other than Liens, if any, created by Bright Horizons).
5.5 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the consummation of the transactions contemplated hereby will not
violate or result in a breach of any applicable laws or regulations, any
judgment, decree or order of any court or governmental body applicable to
ServiceMaster, GreenTree or any affiliate of either ServiceMaster or GreenTree
or the certificate of limited partnership or other organizational documents of
ServiceMaster, GreenTree or any affiliate of either ServiceMaster or GreenTree.
5.6 Brokers Fees. ServiceMaster has no liability or obligation to pay any
------------
fees or commissions to any broker, finder, employee or agent with respect to the
transactions contemplated by this Agreement for which Bright Horizons or
GreenTree could become liable or obligated.
6. REPRESENTATIONS AND WARRANTIES OF BRIGHT HORIZONS CONCERNING THE
TRANSACTION
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<PAGE>
Bright Horizons represents and warrants to ServiceMaster that the
statements made in this Section 6 are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date as though
then made:
6.1 Organization; Power; Authorization
----------------------------------
(a) Bright Horizons is duly organized, validly existing and in good
standing under the laws of the State of Delaware.
(b) Bright Horizons has all requisite corporate and other power and
authority to execute and deliver this Agreement and to execute and deliver each
other agreement or document to be delivered in connection herewith and to
consummate the transactions contemplated by this Agreement.
(c) This Agreement and each other document delivered in connection
herewith by Bright Horizons has been duly and validly authorized, executed and
delivered by Bright Horizons and constitutes a valid, legal and binding
obligation of Bright Horizons, enforceable against Bright Horizons in accordance
with its terms.
(d) Bright Horizons need not give notice to, make any filing with, or
obtain any authorization, consent or approval of, any government or governmental
agency in order to consummate the transactions contemplated by this Agreement.
6.2 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the consummation of the transactions contemplated hereby will not
violate or result in a breach of any applicable laws or regulations, any
judgment, decree or order of any court or governmental body applicable to Bright
Horizons or the articles of incorporation or other organizational documents of
Bright Horizons or violate any provision of Bright Horizons's bylaws or other
internal governance regulations.
6.3 Brokers Fees. Bright Horizons has no liability or obligation to pay
------------
any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which ServiceMaster could become
liable or obligated.
7. REPRESENTATIONS AND WARRANTIES OF SERVICEMASTER CONCERNING GREENTREE
ServiceMaster represents and warrants to Bright Horizons that the
statements made in this Section 7 are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date as though
then made:
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<PAGE>
7.1 Organization, Qualification and Corporate Power of GreenTree.
------------------------------------------------------------
GreenTree is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. GreenTree is duly authorized to
conduct its business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the lack of such
qualification would not have a Material Adverse Effect. GreenTree has full
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it.
7.2 Certificate of Incorporation; Minutes Books; Directors and Officers.
-------------------------------------------------------------------
(a) ServiceMaster has delivered to Bright Horizons true, correct and
complete copies of the certificate of incorporation and bylaws of GreenTree,
each as amended to date.
(b) The minute books containing the records of meetings of the
stockholders, the board of directors and any committees of the board of
directors, the stock certificate books, and the stock record books of GreenTree
are true, correct and complete and have been made available to Bright Horizons.
(c) GreenTree is not in default under or in violation of any provision of
its certificate of incorporation or bylaws.
(d) A true and correct list of the directors and officers of GreenTree is
set forth in Schedule 7.2(d).
---------------
7.3 Capitalization of GreenTree.
---------------------------
(a) The entire authorized capital stock of GreenTree consists of 1,000
shares of common stock, par value $0.01 per share, of which the Shares
constitute all of authorized capital stock which is issued and outstanding.
(b) All of the Shares have been duly authorized, are validly issued, are
fully paid and non-assessable, and are held of record by ServiceMaster.
(c) There are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights or other
contracts or commitments that could require GreenTree to issue, sell or
otherwise cause to become outstanding any of its capital stock. There are no
voting trusts, proxies or other agreements or understandings with respect to the
voting of the capital stock of GreenTree.
7.4 No Conflicts.
------------
(a) Neither the execution, delivery and performance of this Agreement nor
the consummation of the transactions contemplated hereby will (i) violate or
result in a breach of any
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<PAGE>
laws or regulations, any judgment, decree or order of any court or governmental
body or the certificate of incorporation or other organizational documents of
GreenTree or violate any provision of the bylaws of GreenTree or (ii) except as
set forth in Schedule 7.4, conflict with, result in a breach of, constitute a
------------
default under, result in the acceleration of, or create in any person the right
to accelerate, terminate, modify or cancel or require any notice under the
ServiceMaster Contracts or any agreement, contract, lease, license, instrument
or other arrangement to which GreenTree is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Lien upon
any of its assets).
(b) Except as set forth in Section 7.4(c), GreenTree does not need to give
any notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order for the parties
hereto consummate the transactions contemplated by this Agreement.
(c) No license or permit under which GreenTree presently operates its
Child Care Business will be terminated, suspended or revoked as a result of the
Closing, however governmental child care licensing agencies may require child
care license renewals, amendments or reissuances for centers.
7.5 Subsidiaries. GreenTree has no subsidiaries.
------------
7.6 Title to and Sufficiency of Assets. Except as set forth in Schedule
---------------------------------- --------
7.6, GreenTree has good and marketable title to, or a valid leasehold interest
- ---
in, the properties and assets included in the Most Recent Interim Financial
Statements or acquired after the date thereof, or otherwise used by GreenTree,
free and clear of all Liens, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent Interim Financial
Statements and except for the withdrawal of the Excess Cash pursuant to Section
3.4. Except as set forth in Schedule 7.6, such assets and property, together
with the ServiceMaster Contracts, constitute all of the assets and property
owned or leased by ServiceMaster or GreenTree which are used to conduct the
Child Care Business as presently operated by GreenTree and all of the assets and
property that will be required for Bright Horizons to conduct such business
following the consummation of the transaction contemplated hereby in the same
manner as such business was conducted by GreenTree immediately prior to the
Closing Date.
7.7 Financial Statements.
--------------------
(a) The Financial Statements for 1994 have been prepared in accordance
with the Accounting Principles and fairly present the financial condition of
GreenTree as at December 31, 1994 and the results of its operations during the
period commencing on January 1, 1994 and ending on December 31, 1994 and are
correct and complete and are consistent with the books and records of GreenTree.
The Financial Statements for 1994 are attached hereto as Exhibit C-1
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<PAGE>
(b) The Most Recent Interim Financial Statements have been prepared in
accordance with the Accounting Principles, except that notes and other
presentation items have been omitted and except that certain modifications have
been made in the balance sheet included in the Most Recent Interim Financial
Statements is consistent with Section 3.7(a) and the balance sheet as so
modified and the remaining portions of the Most Recent Interim Financial
Statements, fairly present the financial condition of GreenTree as at October
31, 1995 and the results of its operations during the period commencing on
January 1, 1995 and ending on October 31, 1995 and are correct and complete and
are consistent with the books and records of GreenTree. The Most Recent Interim
Financial Statements are attached hereto as Exhibit C-2.
7.8 Events Subsequent to October 31, 1995.
-------------------------------------
(a) Since October 31, 1995, GreenTree has managed and carried out its
business and affairs in the Ordinary Course of Business and there has not
occurred, arisen or been created, as the case may be, any change in the
business, financial condition, operations, or results of operations of GreenTree
which have had, or which could reasonably be expected to have, a Material
Adverse Effect.
(b) Except as set forth in Schedule 7.8(b), since October 31, 1995,
---------------
GreenTree has not declared any dividends, paid any management fees to
ServiceMaster, or made any other distribution of its profits or unrestricted
equity to its stockholder or any other payments to a related party.
(c) Without limiting the generality of Section 7.8(a), since October 31,
1995 GreenTree has not:
(1) sold, leased, transferred or assigned any of its assets (tangible or
intangible) other than for fair consideration in the Ordinary Course
of Business;
(2) entered into any agreement, contract, lease or license (or series of
related agreements, contracts, leases or licenses) involving an annual
payment of more than $25,000;
(3) accelerated, terminated, modified or canceled any material agreement,
contract, lease or license (or series of related agreements,
contracts, leases or licenses) or had any of such instruments
accelerated, terminated, modified or canceled by action of another
party;
(4) imposed or suffered the imposition of any Lien on any of its assets
(tangible or intangible);
(5) except as set forth in Schedule 3.5(a), made any capital expenditure
(or series of related capital expenditures) outside the Ordinary
Course of Business;
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<PAGE>
(6) issued any note, bond or other debt security, or created, incurred,
assumed or guaranteed any indebtedness for, borrowed money or
capitalized lease obligation;
(7) made any capital investment in, or made any loan to, or acquired the
securities of any other person;
(8) delayed or postponed the payments of accounts payable and other
liabilities outside the Ordinary Course of Business;
(9) canceled, compromised, waived or released any right or claim (or
series of related rights or claims) outside the Ordinary Course of
Business;
(10) granted any license or sublicense of any rights under or with respect
to any Intellectual Property;
(11) changed or authorized any change in its certificate of incorporation;
(12) issued, sold or otherwise disposed of any of its capital stock or
granted any options, warrants or other rights to purchase or obtain
any of its capital stock;
(13) experienced any damage, destruction or loss (whether or not covered by
insurance) to its property;
(14) made any loan to, or entered into any other transaction with, any of
its officers or Key Employees;
(15) entered into any employment contract which is materially different
from the form of employment agreement furnished by ServiceMaster to
Bright Horizons or entered into any collective bargaining agreement,
whether written or oral, or modified the terms of any existing such
contract or agreement;
(16) granted any increase in the base compensation of any of its officers
or Key Employees;
(17) made any other change in employment terms for any of its officers or
Key Employees; or
(18) suffered any occurrence, event, incident, action, failure to act or
transaction outside the Ordinary Course of Business.
7.9 No Undisclosed Liabilities. Except as set forth in Schedule 7.9,
-------------------------- ------------
GreenTree has no liability which will be subject to premature repayment as a
result of the transaction contemplated by this Agreement and GreenTree has no
liability other than liabilities set forth on or reflected in
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<PAGE>
the Most Recent Interim Financial Statements and liabilities which have arisen
after the date of the Most Recent Interim Financial Statements in the Ordinary
Course of Business (none of which results from, arises out of, relates to, is in
the nature of or was caused by any breach of contact, breach of warrant, tort,
infringement, or violation of law) nor to the knowledge of ServiceMaster is
there any basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against GreenTree giving rise
to any liability
7.10 Legal Compliance. GreenTree is in compliance with applicable laws,
----------------
rules, regulations, codes, judgment, orders, decrees and rulings in all material
respects; and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand or notice has been filed or commenced against GreenTree
alleging any failure so to comply, provided, that this Section 7.10 does not
apply to matters not known to GreenTree which constitute technical noncompliance
with such regulations, codes, orders, decrees and rulings, but provided further
that the foregoing exception is limited to matters which do not have Material
Adverse Effect.
7.11 Tax Matters.
-----------
(a) GreenTree has filed with the appropriate authorities all Tax returns
and reports required to be filed prior to the Closing Date and GreenTree has
paid all Taxes owed by GreenTree with respect to such periods. All such Tax
returns were correct and complete in all respects.
(b) With respect to any and all Taxes for which GreenTree has become
liable but which are not yet due, adequate reserves therefor have been
established on the books of GreenTree.
(c) There are no Liens on any of the assets of GreenTree that arose in
connection with the failure to pay any Tax when due and payable.
(d) GreenTree (or ServiceMaster, on behalf of GreenTree) has withheld and
paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party.
(e) There is not now pending, and to the best of ServiceMaster's knowledge
there is not now threatened, any suit, claim, investigation or audit by any
governmental or quasi-governmental authority against GreenTree with respect to
Taxes. ServiceMaster does not expect any authority to assess any additional
Taxes for any period for which Tax returns have been filed. There is no dispute
or claim concerning any Tax liability of GreenTree.
(f) GreenTree has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax deficiency or
assessment.
7.12 Real Estate - Owned. GreenTree does not own any real estate.
-------------------
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<PAGE>
7.13 Real Estate - Leased.
--------------------
(a) The real estate properties leased GreenTree as lessee are listed and
described in reasonable detail in Schedule 7.13(a).
----------------
(b) ServiceMaster has delivered to Bright Horizons correct and complete
copies of the leases listed in Schedule 7.13(a).
(c) With respect to each of the properties listed in Schedule 7.13(a),
----------------
(1) the lease is legal, valid, binding and enforceable in full force
and effect;
(2) subject to any required consents, the lease or sublease will
continue to be legal, valid, binding, enforceable and in full
force and effect on identical terms following the consummation of
the transactions contemplated by this Agreement;
(3) subject to any required consents, no party to the lease is in
breach or default, and no event has occurred which, with notice
or lapse of time (or both), would constitute a breach or default
or permit termination, modification or acceleration thereunder;
(4) no party to the lease has repudiated any provision thereof;
(5) there are no disputes, oral agreements or forbearance programs in
effect as to the lease or sublease;
(6) with respect to each sublease, the representations and warranties
set forth in subsections (1) through (5) above are true and
correct with respect to the underlying lease;
(7) neither ServiceMaster nor GreenTree has received any notice to
the effect that a property listed in Schedule 7.13(a) is being
used by GreenTree in violation of any applicable zoning,
building, or environmental protection code and no such violation
has otherwise brought to the attention of either ServiceMaster or
GreenTree by the lessor or other third party having regulatory
authority with respect to such property;
(8) no property listed in Schedule 7.13(a) is being used by GreenTree
in violation of any licensing law or regulation;
(9) GreenTree has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold;
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<PAGE>
(10) there are no parties other than GreenTree in possession of any
parcel of real property listed in Schedule 7.13(a); and
(11) all facilities located on each parcel of real property listed in
Schedule 7.13(a) are supplied with the utilities and other
services necessary for the operation of such facilities.
7.14 Personal Property. Except as set forth in Schedule 7.6, GreenTree
----------------- ------------
owns and has good and marketable title to all items of Personal Property which
it purportedly owns (but not leases) which are reflected in the Most Recent
Interim Financial Statements other than items disposed of since the date of
those statements in the Ordinary Course of Business, and such items of Personal
Property are free and clear of any Liens other than Liens following from
retention of title set forth in contracts for the purchase of goods (or the
relevant invoices) created in the Ordinary Course of Business and for amounts
not yet due and payable and other than Liens reflected in the Most Recent
Interim Financial Statements or arising since the date thereof in the Ordinary
Course of Business. All of the Personal Property has been maintained in
accordance with normal industry practice, is in good operating condition and
repair (subject to normal wear and tear) and is suitable for the purposes for
which it is used.
7.15 [This section left blank intentionally].
7.16 Intellectual Property.
---------------------
(a) Neither GreenTree nor ServiceMaster has registered the "GreenTree"
trade name and service mark at any federal or state registry, but ServiceMaster
has filed an application to register the GreenTree logo. ServiceMaster will
assign such application to GreenTree at the Closing. ServiceMaster has
registered the "GreenTree" trade name and service mark in Japan and has granted
an exclusive license to Fox River Japan, Inc., a Delaware corporation, to
conduct a Child Care Business in Japan under the "GreenTree" trade name and
service mark as registered in Japan. However, ServiceMaster will take all
action necessary to assure that the arrangements which Bright Horizons has made
regarding operations in Japan are not in conflict with the foregoing
arrangements made by ServiceMaster in Japan.
(b) Except as set forth in Schedule 7.16(b), GreenTree owns, or has valid
----------------
licenses or other rights to use, all of the patents, copyrights and trademarks,
service marks, trade dress, logos, trade names and corporate names, and all
goodwill associated therewith, used by GreenTree in the conduct of its business
("the Intellectual Property"). Such Intellectual Property is listed in Schedule
7.16(b).
(c) Except as otherwise noted in Schedule 7.16(b), with respect to each
item listed in Schedule 7.16(b) --
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<PAGE>
(1) the license, sublicense, agreement or permission covering the
item is legal, valid, binding, enforceable and in full force and
effect;
(2) the license, sublicense, agreement or permission will continue to
be legal, valid, binding, enforceable and in full force and
effect on identical terms following the Closing, except that
after the Closing, GreenTree will not have any right to use the
name "ServiceMaster" or any derivation thereof;
(3) no party to the license, sublicense, agreement or permission is
in breach or default, and no event has occurred which with notice
or lapse of time would constitute a breach or default or permit
termination, modification or acceleration thereunder;
(4) with respect to each sublicense, the representations and
warranties set forth in subsections (1) through (3) above are
true and correct with respect to the underlying license; and
(5) GreenTree has not granted any sublicense or similar right with
respect to the license, sublicense, agreement or permission.
(d) The business operations of GreenTree do not interfere with, infringe
upon, misappropriate or violate any intellectual property or related rights of
any third party. GreenTree has not received any notice alleging any such
interference, infringement, misappropriation or violation.
(e) Schedule 7.16(b) discloses that some of the information integrated
into the GreenTree Directors Guide is proprietary to ServiceMaster.
ServiceMaster hereby grants to GreenTree, without charge to GreenTree, a non-
transferable license to use such information and the ServiceMaster's management
training systems which are an integral part of GreenTree's training manuals for
the period commencing on the Closing Date and ending on December 31, 1998,
provided, that the foregoing license does not give GreenTree or Bright Horizons
any right to use the name "ServiceMaster" or any derivative thereof.
7.17 Contracts.
---------
(a) Subject to Section 7.17(d), Schedule 7.17 lists the following
-------------
contracts and agreements to which GreenTree is a party:
(1) any agreement (or group of related agreements) for the lease of
personal property to or from any person which provides for lease
payments in excess of $25,000 per annum and which can not be
terminated by GreenTree without penalty within a period of sixty days
after notice by GreenTree;
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<PAGE>
(2) any agreement (or group of related agreements) for the purchase of
materials, supplies or other personal property, or for the furnishing
or receipt of services the performance of which will extend over a
period of more than one year, which involves consideration in excess
of $25,000 and which can not be terminated by GreenTree without
penalty within a period of sixty days after notice by GreenTree;
(3) any agreement concerning a partnership or joint venture;
(4) any agreement (or group of related agreements) which create, assume or
guarantee any indebtedness for borrowed money or which creates or
extends a capitalized lease obligation and in which the principal
amount is in excess of $25,000 or which has imposed a Lien on any of
its assets, tangible or intangible;
(5) any agreement concerning confidentiality or non-competition;
(6) any agreement with ServiceMaster or any affiliate of ServiceMaster;
(7) any profit-sharing, stock option, stock purchase, stock appreciation,
deferred compensation, severance or other plan or arrangement for the
benefit of current or former Key Employees, directors, officers, or
other employees;
(8) any collective bargaining agreement;
(9) any agreement for the employment of any individual on a full-time,
part-time, consulting or other basis which provides for annual
compensation in excess of $75,000 or which provides severance
benefits;
(10) any agreement under which an advance or loan has been made to any
director, officer or Key Employee;
(11) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect; or
(12) any other agreement (or group of related agreements) the performance
of which includes consideration in excess of $25,000.
ServiceMaster has delivered to Bright Horizons or has otherwise made available
to Bright Horizons a correct and complete copy of each written agreement listed
in Schedule 7.17 and a written summary setting forth the terms and conditions of
each oral agreement included in Schedule 7.17.
(b) With respect to each contract or agreement listed in Schedule 7.17,
-------------
the contract or agreement is legal, valid, binding, enforceable and in full
force and effect at the date hereof; the
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<PAGE>
contract or agreement will continue to be legal, valid, binding, enforceable and
in full force and effect on identical terms following the Closing; and no party
is in breach or default, and no event has occurred which with notice or lapse of
time, or both, would constitute a breach or default or permit termination,
modification or acceleration under the agreement and no party has repudiated any
provision of any such agreement.
(c) Neither ServiceMaster nor GreenTree has received any notification from
any governmental authority that any property used or occupied by GreenTree in
connection with any of the agreements or contracts listed in Schedule 7.17 is
being used or occupied by GreenTree in violation of any applicable zoning,
building, or environmental protection code or, to the knowledge of
ServiceMaster, is in violation of any such code as a result of the use,
occupation or ownership of such property by any other person.
(d) No property being used by GreenTree under any of the agreements or
contracts listed in Schedule 7.17 is being used by GreenTree in violation of any
licensing law or regulation.
(e) This Section 7.17 and Schedule 7.17 does not apply to real estate
leases under which GreenTree is lessee (which leases are covered by Section 7.13
and Schedule 7.13(a) or to the ServiceMaster Contracts (which contracts are
covered by Sections 5.2, 5.3 and 5.4).
7.18 Notes and Accounts Receivable. All notes and accounts receivable of
-----------------------------
GreenTree are reflected properly on its books and records, are valid receivables
which are not subject to any setoffs or counterclaims, are current and
collectible, and will be collected in accordance with their terms at their
recorded amounts, subject only to the reserve for bad debts set forth on the
face of the Most Recent Interim Financial Statements as adjusted for the passage
of time through the Closing Date in accordance with the Accounting Principles.
7.19 Insurance.
---------
(a) Schedule 7.19(a) sets forth the following information with respect to
----------------
each insurance policy (including policies providing property, casualty,
liability and workers compensation coverage and bond and surety arrangements) to
which GreenTree has been a party, a named insured, or otherwise the beneficiary
of coverage at any time within the past five years:
(1) the name of the insurer, the name of the policyholder and the name of
the covered insured;
(2) the policy number and the period of coverage;
(3) the scope of the policy (including an indication whether the coverage
was on a claims made, occurrence or other basis) and the amount of
coverage (including a description of how deductibles and ceilings are
calculated and operate); and
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<PAGE>
(4) a description of any retroactive premium adjustments or other loss-
sharing arrangements.
(b) With respect to each insurance policy identified in Schedule 7.19(a)
which is in effect on the Closing Date:
(1) the policy is legal, valid, binding, enforceable and in full force and
effect;
(2) except as otherwise stated in Schedule 7.19(a), the policy will
----------------
continue to be legal, valid, binding, enforceable and in full force
and effect on identical terms immediately after the Closing;
(3) Neither GreenTree nor ServiceMaster nor, to ServiceMaster's knowledge,
any other party is in breach or default (including with respect to the
payment of premiums or the giving of notices), and no event has
occurred which, with notice or the lapse of time, would constitute
such a breach or default, or permit termination, modification or
acceleration under the policy.
(c) GreenTree has been covered during the past five years by insurance in
scope and amount customary and reasonable for the businesses in which it has
been engaged during such five-year period.
7.20 Litigation. Except as set forth in Schedule 7.20, there is no suit,
---------- -------------
claim or action or legal, administrative, arbitration, or other proceeding or
investigation pending, or to the best of the ServiceMaster's knowledge,
threatened, in any court or before any governmental authority or other
governmental body or arbitral panel against GreenTree.
7.21 Service Contracts and Warranties.
--------------------------------
(a) GreenTree is in compliance with all applicable contractual service
commitments.
(b) Each service provided by GreenTree has been in conformity with all
express and implied warranties, and GreenTree has no liability for damages in
connection therewith, subject only to the reserve for claims set forth on the
face of the Most Recent Interim Financial Statements as adjusted for the passage
of time through the Closing Date in accordance with the Accounting Principles.
(c) No service sold by GreenTree is subject to any guaranty, warranty or
other indemnity beyond the applicable standard terms and conditions of sale.
7.22 Product Liability. GreenTree does not have any liability arising out
-----------------
of any injury to individuals or property as a result of the ownership,
possession or use of any product manufactured, sold, lease or delivered by
GreenTree.
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<PAGE>
7.22A Compliance with Policy Manuals. GreenTree has conducted its
------------------------------
Child Care Business in conformity with its policy manuals except for possible
deviations of a minor nature which do not have a Material Adverse Effect.
7.23 Employees.
---------
(a) No Key Employee has resigned his or her position or employment with
GreenTree since December 31, 1994. Neither ServiceMaster nor GreenTree is aware
of any Key Employee who intends to leave his or her position with GreenTree.
(b) There is no pending and, to the best of ServiceMaster's knowledge, no
threatened (i) claim by any current or former director, officer, employee or
agent of GreenTree against GreenTree, or (iii) strike by the employees of
GreenTree. GreenTree has not received notice of any claim that it has not
complied with any employment, labor or related laws.
7.24 Employment and Pension Agreements.
---------------------------------
(a) Except as (i) expressly provided in employment contracts between
GreenTree and its respective employees, (ii) expressly provided for in the
collective bargaining agreements applicable to GreenTree and its respective
employees, or (iii) established or required by law in the respective
jurisdictions in which GreenTree is organized to do business, there are no
deferred compensation agreements, Multi-Employer Plans (as defined in Section
3(37) of ERISA), bonus plans (other than discretionary payments of annual
bonuses), profit-sharing plans, pension plans, severance pay or retirement
plans, employee stock option or purchase plans, private life insurance plans or
hospitalization insurance plans (collectively referred to as the "Employment and
Pension Agreements") in effect with respect to any current or former director,
officer or other employee of GreenTree which involves a liability material to
the business or condition, financial or otherwise, of GreenTree taken as a
whole.
(b) To the extent required by the Accounting Principles, provisions have
been made in the Financial Statements for 1994 and the Most Recent Financial
Statements for the full amount of all present and future liabilities in respect
of the Employment and Pension Agreements to be paid to current or former
directors, officers or other employees of GreenTree.
(c) ServiceMaster will enter into an agreement effective on the Closing
Date under which ServiceMaster will lease to GreenTree the ServiceMaster
employees who comprised the GreenTree staff immediately prior to the Closing
Date. Such lease will be for the period December 1, 1995 to and including
December 31, 1995 and will be on such terms and conditions as are set forth in
the leasing agreement.
(d) ServiceMaster will provide all notices required under COBRA. After the
Closing, (i) all employees who elect COBRA cover will pay the premiums required
of employees as
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<PAGE>
pursuant to the provisions by COBRA, and Bright Horizons will pay the employer's
share of such premium; and (ii) ServiceMaster will pay the actual adjusted cost
of COBRA claims.
(e) ServiceMaster will be responsible for continuing the benefits (if any)
which were available to employees who, for whatever reason, were not actively
working at GreenTree at January 1, 1996 and there shall be no assignment of any
such employee's employment agreement from ServiceMaster to Bright Horizons or
GreenTree in connection with this transaction. Any of such employees who
desires to return to GreenTree at the expiration of the time allowed for such
leave will be employed by GreenTree or Bright Horizons. ServiceMaster's
responsibilities under the first sentence of this Section 7.24(e) will expire as
to each employee upon such re-employment (if it occurs).
7.25 Guarantees. GreenTree is not a guarantor or otherwise liable for any
----------
obligation (including indebtedness) of a person who is not GreenTree.
7.26 Environmental, Health and Safety.
--------------------------------
(a) GreenTree has complied with all environmental, health and safety laws,
and no action, suit, proceeding, investigation, charge, complaint, claim, demand
or notice has been filed or commenced against it alleging any failure so to
comply. Without limiting the generality of the preceding sentence, GreenTree
has obtained and been in compliance with all of the terms and conditions of all
permits, licenses and other authorizations which are required under, and has
complied with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables which are
contained in all applicable environmental, health and safety laws.
(b) GreenTree has not handled or disposed of any substance, arranged for
the disposal of any substance, exposed any employee or other individual to any
substance or condition, or owned or operated any property or facility in any
manner that could form the basis for any present or future action, suit,
proceeding, hearing, investigation charge, complaint, claim or demand against
GreenTree for damage to any site, location or body of water (surface or
subsurface) for any illness of or personal injury to any employee or other
individual, for any reason under any environmental, health and safety law.
7.27 Business Records. All customer records or lists, accounts or
----------------
accounting records, tax returns, market information, marketing or business plans
or any other similar business records, documents or materials of GreenTree are
kept in a reasonably organized fashion by GreenTree.
7.28 Brokers Fees. GreenTree has no liability or obligation to pay any
------------
fees or commissions to any broker, finder, agent or employee with respect to the
transactions contemplated by this Agreement.
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<PAGE>
7.29 Disclosure. The representations contained in this Section 7 do not
----------
contain any untrue statement of any fact or omit to state any material fact
necessary in order to make the statements and information in this Section 7 not
misleading.
8. PRE-CLOSING COVENANTS
The parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the parties will use its reasonable best efforts to
-------
take all action and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement.
8.2 Notices and Consents. ServiceMaster will cause GreenTree to give any
--------------------
notices to third parties, and will cause GreenTree to use its best efforts to
obtain any third-party consents, that Bright Horizons reasonably may request.
Each of the parties will (and ServiceMaster will cause GreenTree to) give any
notices to, make any filings with, and use its best efforts to obtain any
necessary authorizations, consents and approvals of governments and governmental
agencies. Such consents will be in a form acceptable to Bright Horizons.
8.3 Operation of Business. ServiceMaster will not cause or permit
---------------------
GreenTree to engage in any practice, take any action, or enter into any
transaction, outside the Ordinary Course of Business (except for taking the
actions described in Section 8.2).
8.4 Preservation of Business. ServiceMaster will cause GreenTree to keep
------------------------
its business and properties substantially intact, including its present
operations, physical facilities, working conditions and relationships with
lessors, licensors, suppliers, customers and employees.
8.5 Full Access. ServiceMaster will permit, and ServiceMaster will cause
-----------
GreenTree to permit, representatives of Bright Horizons to have full access at
all reasonable times, and in a manner so as not to interfere with the normal
business operations of GreenTree, to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
GreenTree.
8.6 Notice of Developments.
----------------------
(a) ServiceMaster will give prompt written notice to Bright Horizons of
any material adverse development which results in a breach of any one or more of
the representationes or warranties made in Section 5 and 7 above.
(b) Bright Horizons will give prompt written notice to ServiceMaster of
any material adverse development which results in a breach of any one or more of
the representationes or warranties made in Section 6 above.
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<PAGE>
9. POST CLOSING COVENANTS
The parties agree as follows with respect to the period following the
Closing:
9.1 [This Section left intentionally blank.]
9.2 Confidentiality.
---------------
(a) Bright Horizons and ServiceMaster shall not, and shall not permit any
affiliated person or entity to, disclose any Confidential Information unless (i)
required to do so by law, (ii) required to do so by any applicable stock
exchange regulations, (iii) such disclosure is made in connection with the
Ordinary Course of Business of GreenTree, or (iv) such disclosure has been
consented to by ServiceMaster in the case of a disclosure by Bright Horizons and
by Bright Horizons in the case of a disclosure by ServiceMaster, which consent
shall not be unreasonably withheld.
(b) ServiceMaster will treat and hold as such all of the Confidential
Information, refrain from using any of the Confidential Information except in
connection with this Agreement, and deliver promptly to Bright Horizons or
destroy, at the request and option of Bright Horizons, all tangible embodiments
(and all copies) of the Confidential Information which are in ServiceMaster's
possession. In the event that ServiceMaster is requested or required (by oral
question or request for information or documents in any legal proceeding,
interrogatory, subpoena, civil investigative demand, or similar process) to
disclose any Confidential Information, ServiceMaster will notify Bright Horizons
promptly of the request or requirement so that Bright Horizons may seek and
appropriate protective order or waive compliance with this Section 9.2(b). If,
in the absence of a protective order or the receipt of a waiver hereunder any
representative of ServiceMaster is, on the advice of counsel, compelled to
disclose any Confidential Information to any tribunal or else stand liable for
contempt, that representative of ServiceMaster may disclose the Confidential
Information to the tribunal; provided, however, that ServiceMaster shall use its
best efforts to obtain, at the request of Bright Horizons, an order or other
assurance that confidential treatment will be accorded to such portion of the
Confidential Information required to be disclosed as Bright Horizons shall
designate. The foregoing provisions shall not apply to any Confidential
Information which is generally available to the public immediately prior to the
time of disclosure and the foregoing provisions are subject to paragraph (c)
below.
(c) Anything in the foregoing provisions of this Section 9.2 to the
contrary notwithstanding, ServiceMaster may retain all materials or copies of
material relating to GreenTree's Tax liability for all periods ending on the
Closing Date and all materials relating to any matter for which ServiceMaster is
committed to indemnify Bright Horizons pursuant to this Agreement.
9.3 Cooperation in Financial Audits. ServiceMaster agrees to cooperate,
-------------------------------
at its own expense, with Bright Horizons and any independent accounting firm
retained by Bright Horizons
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<PAGE>
in any financial audit of GreenTree for periods prior to the Closing Date. The
parties agree to cooperate in the preparation of federal and state income tax
returns and ServiceMaster shall file short year tax returns where required, if
any.
9.4 Further Assurances. If at any time after the Closing any further
------------------
action is necessary or desirable to carry out the purposes of this Agreement,
each of the parties will take such further action, including the execution and
delivery of such further instruments and documents, as the other party may
reasonably request, all at the sole cost and expense of the requesting party
(unless the requesting party is entitled to indemnification therefor under
Section 11). ServiceMaster acknowledges and agrees that from and after the
Closing, Bright Horizons will be entitled to possession of all documents, books,
records (including Tax records), agreements and financial data of any sort
relating to GreenTree.
9.5 Litigation Support. If, and for so long as, any party is actively
------------------
contesting or defending against any action, suit proceeding, hearing,
investigation, charge, complaint, claim or demand in connection with, any
transaction contemplated under this Agreement or any matter which originated on
or prior to the Closing Date involving any of GreenTree or its affiliates, the
other party will cooperate with the contesting or defending party and its
counsel in the contest or defense, make available its personnel, and provide
such testimony and access to its books and records as shall be necessary in
connection with the contest or defense, all at the sole cost and expense of the
contesting or defending party (unless the contesting or defending party is
entitled to indemnification therefor under Section 11).
9.6 Transition. ServiceMaster will not take any action that is designed
----------
or intended to have the effect of discouraging any lessor, licensor, customer,
supplier or other person having a business relationship with GreenTree from
maintaining the same business relationships with GreenTree after the Closing as
it maintained with GreenTree prior to the Closing. ServiceMaster will refer all
customer inquires relating to the business of GreenTree to GreenTree from and
after the Closing. ServiceMaster acknowledges and agrees that from and after
the Closing, Bright Horizons will be entitled to possession of all documents,
books, records (including Tax records), agreements and financial date of any
sort relating to GreenTree but that such possession is subject to the right of
ServiceMaster to have access to such materials and to make copies thereof to
the extent provided in this Agreement.
9.7 Change of Name. ServiceMaster, as agent for GreenTree, will file such
--------------
documents as are necessary to cause the corporate name of GreenTree to be
changed as provided in Section 4.
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<PAGE>
10. COVENANT NOT TO COMPETE
10.1 ServiceMaster Covenant.
----------------------
(a) ServiceMaster covenants and agrees that, for a period of three years
from and after the Closing Date, neither ServiceMaster nor any present or future
affiliate of ServiceMaster will engage directly or indirectly in the Child Care
Business in the United States or in any portion thereof where this covenant may
be enforced.
(b) If the final judgment of a court of competent jurisdiction declares
that any term or provision of Section 10.1(a) is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration or area of
the term or provision, to delete specific words or phrases, or to replace any
invalid or unenforceable term or provision with a term or provision that is
valid and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision, and this Agreement shall be
enforceable as so modified after the expiration of the time within which the
judgment may be appealed.
11. CONDITIONS TO THE OBLIGATIONS OF THE PARTIES TO CLOSE
11.1 Conditions to the Obligation of Bright Horizons to Close.
--------------------------------------------------------
(a) The obligation of Bright Horizons to consummate the transactions to be
performed by it in connection with the Closing is subject to the satisfaction of
the following conditions:
(1) The representations and warranties set forth in Section 5 and in
Section 7 shall be true and correct in all material respects at and as
of the Closing Date;
(2) ServiceMaster shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(3) Since October 31, 1995, there shall not have occurred, nor shall there
exist as of the Closing, any event or circumstance that constitutes or
has result in or will, with the passage of time, result in a Material
Adverse Effect;
(4) With respect to the ServiceMaster Leases, the ServiceMaster Service
Agreements and leases and service agreements under which GreenTree is
the lessee or service provider, the extent to which third party
consents must be in hand as a condition to Bright Horizons' obligation
to close is set forth in Section 11A;
(5) No action, suit or proceeding shall be pending or threatened before
any court or quasi-judicial or administrative agency wherein an
unfavorable injunction,
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<PAGE>
judgment, order, decree or ruling would prevent consummation of any of
the transactions contemplated by this Agreement or to be rescinded
following consummation or adversely affect the right of Bright
Horizons to own the stock of GreenTree and to control GreenTree or
adversely affect the right of GreenTree to own its assets and to
operate its business and no such injunction, judgment, order, decree,
ruling or charge shall be in effect;
(6) Bright Horizons shall have received the resignation, effective as of
the Closing, of each officer of GreenTree other than those whom Bright
Horizons shall have specified in writing at least five business days
prior to the Closing;
(7) Bright Horizons shall have received the resignation, effective as of
the Closing, of each director of GreenTree;
(8) [This Section intentionally left blank.]
(9) Bright Horizons shall have received an opinion of Vernon T. Squires,
Sr. Vice President and General Counsel of ServiceMaster, in the form
of that attached hereto as Exhibit D-1;
(10) Each license or permit needed by GreenTree to operate the Child Care
Business as operated by GreenTree prior to the Closing shall be in
effect at the Closing and shall not be terminated, suspended or
revoked as a result of the consummation of the transactions
contemplated hereby. ServiceMaster has informed Bright Horizons that
GreenTree will be able to continue to conduct its Child Care Business
for a reasonable period of time after the Closing pursuant to such
licenses and that, if GreenTree's Child Care Business is conducted
after the Closing in substantially the same manner as the Child Care
Business was conducted immediately prior to the Closing, ServiceMaster
does not expect GreenTree or Bright Horizons to encounter any material
difficulty in having such licenses or permits renewed or reissued, but
Bright Horizons understands that: (i) some or all of such licenses may
have to be renewed or reissued after the Closing as a result of the
change in control of GreenTree and/or changes in GreenTree's board of
directors and officers and/or the change in GreenTree's corporate
name; (ii) Bright Horizons has the responsibility for obtaining all of
such license renewals or reissuances; and (iii) ServiceMaster will not
be responsible for any problems which may be encountered by Bright
Horizons in regard to such license renewals or reissuance if the
difficulty is attributable to actions of Bright Horizons after the
Closing;
(11) ServiceMaster shall have delivered to Bright Horizons a certificate
from an officer of ServiceMaster that each of the conditions specified
in this Section 11.1 has been satisfied in all respects; and
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<PAGE>
(12) ServiceMaster shall have delivered to Bright Horizons a bill of sale
from ServiceMaster to GreenTree which transfers any interest which
ServiceMaster may have in the personal property described in Section
7.6, provided, that such bill of sale shall not assign the assets
listed in paragraph [2] of Schedule 7.6.
(b) Bright Horizons may waive any condition specified in this
Section 11.1.
11.2 Conditions to ServiceMaster's Obligation to Close.
-------------------------------------------------
(a) The obligation of ServiceMaster to consummate the transactions to be
performed by it in connection with the Closing is subject to the satisfaction of
the following conditions:
(1) the representations and warranties set forth in Section 6 shall be
true and correct in all material respects at and as of the Closing
Date;
(2) Bright Horizons shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(3) Bright Horizons shall have procured all necessary third party
consents;
(4) No action, suit or proceeding shall be pending or threatened before
any court or quasi-judicial or administrative agency wherein an
unfavorable injunction, judgment, order, decree or ruling would
prevent consummation of any of the transactions contemplated by this
Agreement or to be rescinded following consummation;
(5) ServiceMaster shall have received the documents which will enable
ServiceMaster to make the filings after the Closing which will change
the corporate name of GreenTree;
(6) ServiceMaster shall have received an opinion of Ropes & Gray in the
form of that attached hereto as Exhibit E-1;
(7) Bright Horizons shall have delivered to ServiceMaster a certificate
from an officer of Bright Horizons that each of the conditions
specified in this Section 11.2 has been satisfied in all respects; and
(8) Bright Horizons shall have delivered to ServiceMaster an agreement
which shall be to the effect that, if and to the extent that
ServiceMaster remains liable for the performance after the Closing of
the lessee's post-closing obligations under any of the ServiceMaster
Contracts or any of the leases under which GreenTree is the lessee,
Bright Horizons will indemnify and hold ServiceMaster harmless from
any costs or expenses which arise out of such remaining liability
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<PAGE>
(9) Bright Horizons shall have delivered to ServiceMaster a written
confirmation by a recognized investment banking firm that the value of
the common stock of Bright Horizons as of the date of this Agreement
is approximately $3.00 per share.
(b) ServiceMaster may waive any condition specified in this Section 11.2.
11A. THIRD PARTY CONSENTS RE SERVICEMASTER LEASES, ETC.
11A.1 19-Out-Of-24 Requirement. Bright Horizons shall have no obligation
------------------------
to close unless, with respect to the 24 GreenTree child care centers which are
operating under a ServiceMaster Lease, a ServiceMaster Services Agreement, a
lease to GreenTree or a service agreement with GreenTree (hereinafter referred
to in this Section 11A as an "Occupancy Agreement"), for at least 19 of such
child care centers either --
(i) ServiceMaster shall have in hand at the closing consents from the
landlord or GreenTree customer which consents to the assignment of the
ServiceMaster Lease and/or the change in control of GreenTree; or
(ii) landlord or customer consents are not required for such Occupancy
Agreements on account of the transaction contemplated by this Agreement,
11A.2 Commitment to Obtain Missing Consents. To the extent that as of the
-------------------------------------
Closing, ServiceMaster shall have obtained more than 18 but less than 24
consents with respect to the Occupancy Agreements, ServiceMaster covenants and
agrees that it will obtain the remaining consents on or prior to January 31,
1996.
11A.3 ServiceMaster's Obligation to Repurchase Centers. To the extent
------------------------------------------------
that on January 31, 1996 all 24 child care centers are not fully covered by
landlord or customer consents (or such consents are not required), then
ServiceMaster agrees to repurchase from GreenTree, at a price equal to 1/27 of
the Purchase Price (as adjusted) per center, each center for which a landlord or
customer consent was required but not obtained.
11A.4 ServiceMaster's Right to Dispose of Reacquired Centers. Any
------------------------------------------------------
GreenTree child care center which ServiceMaster is required to repurchase under
Section 11A.3 may be sold by ServiceMaster to a third party, any provisions of
Section 10 hereof to the contrary notwithstanding.
11A.5 Payment for Repurchased Centers. Any payment due to Bright Horizons
-------------------------------
pursuant to this Section 11A shall be a Purchase Price reduction and the
provisions of Section 3.8 shall apply to this Section 11A.
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12. REMEDIES FOR BREACHES OF AGREEMENT; INDEMNIFICATION
12.1 Survival of Bright Horizon's Representations and Warranties. The
-----------------------------------------------------------
representations and warranties of Bright Horizons as set forth in Section 6 of
this Agreement shall survive the Closing and shall continue in full force and
effect indefinitely (subject to any applicable statutes of limitation).
12.2 Survival of ServiceMaster's Representations and Warranties.
----------------------------------------------------------
(a) The representations and warranties of ServiceMaster as set forth in
Section 5 of this Agreement shall survive the Closing and shall continue in full
force and effect indefinitely (subject to any applicable statutes of
limitation).
(b) The representations and warranties of ServiceMaster as set forth in
this Agreement other than in Section 5 shall survive the Closing and shall
continue in full force and effect to December 31, 1997, except that the
representations and warranties contained in Section 7.10 shall continue in full
force and effect until the last of the applicable statutes of limitation has
expired or a taxable period has otherwise been closed by agreement with the
relevant tax authority or by a judicial determination which is final and not
subject to appeal.
12.3 Indemnification Provisions for the Benefit of ServiceMaster. Bright
-----------------------------------------------------------
Horizons agrees to indemnify and hold ServiceMaster harmless from and against
any and all losses, damages, claims, liabilities and/or expenses incurred by
ServiceMaster as a result of any untruth or a breach of any representation or
warranty of Bright Horizons herein, provided, that ServiceMaster makes a written
claim for indemnification by Bright Horizons.
12.4 Indemnification Provisions for the Benefit of Bright Horizons.
-------------------------------------------------------------
(a) As used in this Section 12.4, the following terms shall have the
indicated meanings:
"Losses" shall have the meaning set forth in Section 12.4(b).
"Indemnifiable Loss" means a Loss (or a series of Nominal Losses which are
so similar in nature or interrelated that they are, in effect, one Loss)
which is otherwise indemnifiable under this Section 12.4 and the amount of
which is $10,000 or more.
"Nominal Loss" means a Loss which is otherwise indemnifiable under this
Section 12.4 and the amount of which is less than $10,000.
(b) Subject to the limitations set forth in Section 12.4(c) and to the
other provisions of this Section 12.4 other than Section 12.4(d), ServiceMaster
agrees to indemnify and hold Bright Horizons and GreenTree harmless from and
against any and all losses, damages, claims, liabilities
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<PAGE>
and/or expenses incurred by Bright Horizons or GreenTree as a result of any
untruth or a breach of any representation or warranty of ServiceMaster herein
("Losses"), provided, that Bright Horizons makes a written claim for
--------
indemnification by ServiceMaster before the expiration of the survival period of
the representation or warranty which is alleged to have been breached.
(c) ServiceMaster shall not be obligated to indemnify Bright Horizons for
a Loss unless: (i) the Loss is an Indemnifiable Loss and (ii) the aggregate
amount of all Losses (both Indemnifiable Losses and Nominal Losses) has become
greater than $50,000, in which case ServiceMaster shall be obligated to
indemnify Bright Horizons for the aggregate amount of all Losses. In order to
determine the extent to which the foregoing "basket amount" has been used up,
Bright Horizons agrees to give ServiceMaster notice from time to time of the
existence of Losses which Bright Horizons considers to be applicable against the
basket amount. ServiceMaster shall have the right to contest such
determination. In the event of a disagreement between the parties regarding the
occurrence of a Loss, the parties shall confer and make a good faith effort to
resolve the matter by mutual agreement.
(d) Subject to the provisions of this Section 12.4 other than Sections
12.4(b) and (c), ServiceMaster agrees to indemnify and hold Bright Horizons and
GreenTree and their officers and directors of GreenTree and Bright Horizons
harmless from and against --
(1) any and all losses, damages, claims and liabilities and/or expenses
incurred by Bright Horizons or GreenTree which have their origin in
tort or negligence claims asserted by third parties in respect of
actions or failures to take action by GreenTree personnel in the Child
Care Business as conducted by GreenTree prior to the Closing Date;
(2) any and all payments for taxes, and any interest and penalties
relating thereto, made by or for the account of GreenTree which are
attributable to any year ending prior to the year 1995 or to that
portion of the year 1995 which commenced on January 1, 1995 and ended
on the Closing Date;
(3) any and all payments for amounts due under any leases which are
attributable to a period or periods ending on or prior to the Closing
Date, provided that ServiceMaster's obligation under this item (3)
shall expire on June 30, 1996;
(4) any and all losses, damages, claims and liabilities and/or expenses
incurred by Bright Horizons or GreenTree which are in the nature of a
claim for which the EEOC or comparable state agency would have
jurisdiction;
(5) any and all workers compensation claims with respect to a period or
periods ending on or prior to the December 31, 1995; and
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(6) any and all losses, damages, claims and liabilities and/or expenses
incurred by Bright Horizons or GreenTree as a result of the failure of
ServiceMaster to comply with the last sentence of 7.16(a).
(e) Subject to the provisions of this Section 12.4, other than Sections
12.4(b) and (c), the following special indemnity provisions shall apply with
respect to accounts payable of GreenTree:
(1) ServiceMaster agrees to reimburse Bright Horizons (or GreenTree, if
Bright Horizons directs) for the amount of all invoices received by
GreenTree which relate to the delivery of goods or services received
prior to November 1, 1995 (which have not been paid prior to the
November 30, 1995);
(2) ServiceMaster shall not be responsible for, and shall not reimburse
GreenTree or Bright Horizons for, the amount of invoices received by
GreenTree which relate to the delivery of goods or services received
by GreenTree after October 31, 1995 and prior to December 1, 1995
(which have not been paid prior to November 30, 1995) if and to the
extent that the cumulative amount of such invoices is less than or
equal to $125,000;
(3) ServiceMaster shall be responsible for, and shall reimburse GreenTree
or Bright Horizons for, the amount of invoices received by GreenTree
after November 30, 1995 which relate to the delivery of goods or
services received by GreenTree after October 31, 1995 and prior to
December 1, 1995 (which have not been paid prior to November 30, 1995)
if and to the extent that the cumulative amount of such invoices
exceeds $125,000.
(f) Any and all claims for indemnification under this Section 12.4 shall
be made in writing as soon as practicable after Bright Horizons becomes aware of
such claim, describing in detail the nature of and the grounds for the claim and
a good faith estimate of the amount claimed, provided, that a failure to provide
such notice shall not affect the indemnification provided hereunder except to
the extent that ServiceMaster has been actually prejudiced as a result of such
failure. ServiceMaster shall pay to Bright Horizons any amounts to which Bright
Horizons is entitled as indemnification hereunder as soon as practicable and in
no event later than thirty (30) days after the claim for such indemnification
has been submitted by Bright Horizons to ServiceMaster without objection by
ServiceMaster, or if such claim is disputed by ServiceMaster, as soon as
practicable after such dispute is resolved and in no event later than thirty
(30) days after the execution of a valid and binding settlement agreement
between the claimant and GreenTree or the entry of a valid and final award by a
court of competent jurisdiction. Notwithstanding the foregoing, Bright Horizons,
at its election, shall be entitled to offset an amount equal to the amount of
indemnification to which it is entitled from ServiceMaster pursuant to this
Section 11 from any payment due ServiceMaster pursuant to the Note.
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<PAGE>
(g) The amount of any Loss shall be calculated after taking into account
any tax benefits which may be realized under any applicable law by Bright
Horizons or GreenTree on account of the Loss.
(h) Any indemnification of Losses under this Agreement shall be considered
a reduction of the Purchase Price, and such reduction of the Purchase Price
shall be the sole and exclusive remedy for any claim by Bright Horizons in
connection with the transactions arising out of this Agreement and Bright
Horizons hereby waives all other rights it may have in respect thereof. If and
to the extent that Bright Horizons has offset any part of its obligations under
the Note and the means of collecting an amount due from ServiceMaster under this
Section 12, then the Purchase Price shall be considered to have been reduced to
that extent for purposes of this Section 12.(g). This Section 12.4(g) does not
apply to indemnification under Section 12.4(d)-(e) or to any matter involving
fraud or intentional misrepresentation.
(i) Except for the matters described in Section 12.4(d)-(e), any and all
obligations of ServiceMaster to indemnify Bright Horizons in respect of any
claims hereunder shall terminate at the end of the survival period for the
underlying representation or warranty, except for pending claims for
indemnification.
13. PROCEDURE REGARDING THIRD PARTY CLAIMS
13.1 Obligations of Bright Horizons. Whenever Bright Horizons becomes
------------------------------
aware of any claim, suit, action or proceeding by a third party against
GreenTree which may give rise to a Loss which is indemnifiable under Section 11,
Bright Horizons shall:
(a) Not make any admission of liability, agreement or compromise to or
with any person, entity or authority in relation thereto without the prior
written consent of ServiceMaster, which consent shall not be unreasonably
withheld;
(b) Permit ServiceMaster and its professional advisors to have access to
the personnel of GreenTree and to any relevant accounts, documents and records
within the possession or control of GreenTree to enable ServiceMaster and its
professional advisors to assess the merits and potential liability in respect of
such claim, suit, action or proceeding and to take copies or photographs of such
relevant accounts, documents and records at their own expense; provided,
--------
however, that notwithstanding the foregoing ServiceMaster shall have no rights
- -------
under this Section 12 if Bright Horizons shall agree to discharge and release
ServiceMaster from its indemnification obligation hereunder in respect of the
Loss or portion thereof which arises out of such claim, suit action or
proceeding; and
(c) Upon the request of ServiceMaster, tender the defense of any such
claim, suit, action or proceeding to ServiceMaster, in which event ServiceMaster
shall assume the entire liability and obligation in respect of such claim, suit,
action or proceeding and shall be relieved
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<PAGE>
of its indemnification obligations under Section 11 for any and all Losses
resulting from such claim, suit, action or proceeding which are incurred after
ServiceMaster has assumed such defense.
14. MISCELLANEOUS
14.1 Entire Agreement. This Agreement, including all Exhibits and
----------------
Schedules, supersedes any and all other agreements, oral or written, between the
parties hereto with respect to the subject matter hereof, and contains the
entire agreement between such parties with respect to the transaction
contemplated hereby.
14.2 Amendments and Waivers.
----------------------
(a) No amendment of any provision of this Agreement shall be valid unless
the same is in writing and signed by Bright Horizons and by ServiceMaster.
(b) No waiver by either party of any default, misrepresentation or breach
of warranty or covenant shall be deemed to extend to any prior or subsequent
default, misrepresentation or breach of warranty or covenant.
(c) This Agreement may be amended only pursuant to a written instrument
executed by both parties.
14.3 Parties in Interest. This Agreement shall be binding upon and
-------------------
inure to the benefit of the parties and may not be assigned by any party hereto
without the prior written consent of the other parties.
14.4 Notices. Any and all notices, consents and other communications to be
-------
provided hereunder shall be provided in accordance with the following notice
information:
If to ServiceMaster, to:
The ServiceMaster Company
One ServiceMaster Way
Downers Grove, IL 60515
Attn: Robert D. Erickson
President, International and
New Business Development
Fax number: (708) 271-5870
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<PAGE>
If to Bright Horizons, to:
Bright Horizons Children's Centers, Inc.
One Kendall Square - Building 200
Cambridge, MA 02139
Attn: Roger H. Brown
Chief Executive Officer
With a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Attn: Alfred O. Rose, Esq.
14.5 Costs.
-----
(a) ServiceMaster and Bright Horizons will each bear their own fees and
expenses incurred in connection with the negotiation, preparation and execution
of this Agreement.
(b) ServiceMaster represents and warrants that GreenTree has not borne,
and GreenTree will not bear, any of ServiceMaster's costs and expenses
(including any of their legal or accounting fees and expenses) in connection
with this Agreement or any of the transactions contemplated hereunder.
14.6 Press Release. The parties agree that a special press release shall
-------------
be issued jointly by the parties on the Closing Date.
14.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
14.8 Incorporation of Exhibits and Schedule. The Exhibits and Schedules
--------------------------------------
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.9 Construction.
------------
(a) The parties have participated jointly in the negotiation and drafting
of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of
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<PAGE>
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement.
(b) The parties intend that each representation, warranty or covenant
contained herein shall have independent significance. If any party has breached
any representation, warranty or covenant contained herein in any respect, the
fact that there exists another representation, warranty or covenant relating to
the same subject matter (regardless of the relative levels of specificity) which
the party has not breached shall not detract from or mitigate the fact that the
party is in breach of the first representation, warranty or covenant.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THE SERVICEMASTER COMPANY LIMITED PARTNERSHIP
By: ServiceMaster Management Corporation
(general partner)
By: ________________________________
Its
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
By: ________________________________
Its
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<PAGE>
SCHEDULE 2-1
------------
Exceptions to Accounting Principles
-----------------------------------
The accounting principles utilized by GreenTree have deviated from United States
generally accepted accounting principles with respect to the following matters:
Accounting for leases in accordance with FASB 13
Cash flow statements
Footnotes and other presentation items
Parent vacations
Employee vacations
Accounts payable
The Most Recent Interim Financial Statements and the Closing Balance sheet have
been prepared as described in Section 7.7(b) and Section 7.7(c). These
statements are therefore not totally consistent with the Financial Statements
for 1994.
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<PAGE>
SCHEDULE 2-3
Purchase Price Allocation
-------------------------
The Purchase Price shall be allocated as follows:
Tangible assets: $3,000,000
Non-Competition Agreement: $2,000,000
ServiceMaster Contracts $1,000,000 *
(If the Purchase Price is adjusted so that it is not $6,000,000, then the amount
of the Purchase Price which is allocated to the ServiceMaster Contracts will be
the Purchase Price minus $5,000,000).
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<PAGE>
EXHIBIT 21
SUBSIDIARIES
Burud & Associates, Inc.
GreenTree Child Care Services, Inc.
Cornerstone Horizons, Inc.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated August 1, 1996 and
July 2, 1996, relating to the financial statements of Bright Horizons
Children's Centers, Inc. and GreenTree Child Care Services, Inc.,
respectively, which appear in such Prospectus. We also consent to the
application of our report dated August 1, 1996 to the Financial Statement
Schedule for the three years ended June 30, 1996 listed under Item 16(b) of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in our
report dated August 1, 1996 also included this schedule. We also consent to
the references to us under the headings "Experts" and "Selected Financial and
Operating Data" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Financial and
Operating Data."
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
December 13, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996
<CASH> 4,583,257 5,340,856
<SECURITIES> 0 0
<RECEIVABLES> 2,470,073 2,404,744
<ALLOWANCES> 307,458 313,202
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,030,287 11,247,974
<PP&E> 11,870,157 12,491,345
<DEPRECIATION> 3,664,084 3,981,212
<TOTAL-ASSETS> 23,229,367 24,637,208
<CURRENT-LIABILITIES> 9,076,360 10,395,896
<BONDS> 4,247,559 4,270,745
18,606,736 18,881,292
0 0
<COMMON> 3,304 3,316
<OTHER-SE> 62,536 64,782
<TOTAL-LIABILITY-AND-EQUITY> 23,229,367 24,637,208
<SALES> 64,181,377 19,712,863
<TOTAL-REVENUES> 64,181,377 19,712,863
<CGS> 55,614,948 17,215,042
<TOTAL-COSTS> 55,614,948 17,215,042
<OTHER-EXPENSES> 8,056,243 2,188,373
<LOSS-PROVISION> 261,850 30,064
<INTEREST-EXPENSE> 291,899 98,280
<INCOME-PRETAX> 315,831 240,972
<INCOME-TAX> (1,005,000) 120,000
<INCOME-CONTINUING> 510,186 309,448
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,320,831 120,972
<EPS-PRIMARY> 0.52 0.05
<EPS-DILUTED> 0.51 0.05
</TABLE>
