<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
---------------
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: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 Par Value................... $23,000,000 $6,970.00
</TABLE>
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(1)Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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
OCTOBER 29, 1996
Shares
[LOGO OF BRIGHT HORIZONS CHILDREN'S CENTERS, INC. APPEARS HERE]
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 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 6.
--------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 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
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 is the leading provider of corporate-sponsored work-site
child care services in the United States, operating 129 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. Since the end of fiscal
1992, Bright Horizons has grown from 41 to 129 centers, with revenues during
the past five fiscal years increasing at a 39% compound annual rate from $17.1
million to $64.2 million. 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 Bright Horizons and others
pioneered 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.
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 corporate
sponsor support. 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
3
<PAGE>
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 these highly qualified center directors
by offering compensation more than 30% 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.
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 September 30, 1996.
Excludes (i) 303,071 shares of Common Stock reserved for issuance upon
exercise of options outstanding with a weighted average exercise price of
$3.14 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 to purchase 168,952
shares of Common Stock upon the closing of the offering. See Notes 7 and 8
to Consolidated Financial Statements.
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------
1992 1993 1994 1995 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $17,060 $23,812 $32,012 $43,693 $64,181
Gross profit.................... 1,958 3,201 4,420 6,484 8,566
General and administrative
expenses....................... 2,130 2,285 2,783 3,739 4,660
Marketing and development
expenses....................... 775 749 795 1,435 1,716
Amortization of non-compete
agreements (2)................. -- -- -- 80 1,680
------- ------- ------- ------- -------
Income (loss) from operations. (947) 167 842 1,230 510
Net income (loss) (3)........... $ (889) $ 153 $ 1,144 $ 1,633 $ 1,321
Net income (loss) per share (4). $ 0.51
Weighted average number of
common and common equivalent
shares (4)..................... 2,597
SELECTED OPERATING DATA:
Number of child care centers at
fiscal year end................ 41 54 73 87 124
Licensed capacity at fiscal year
end (5)........................ 3,484 4,198 6,239 7,270 12,638
Average utilization rate (6).... 72.5% 76.4% 75.2% 75.7% 76.2%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 954
Total assets........................................ 23,229
Long-term debt and capital lease obligations, net of
current portion....................................... 4,248
Mandatorily redeemable convertible preferred stock.. 18,606
Total stockholders' equity (deficit)................ $(11,215)
</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. 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.
(4) Calculated on the basis described in Note 1 to Consolidated Financial
Statements.
(5) Represents the total capacity permitted under applicable state licenses.
(6) Calculated as total tuition revenue as a percentage of total potential
tuition revenue, assuming 100% full-time occupancy and the appropriate age
mix of children, for the applicable period.
(7) As adjusted to reflect (i) the conversion of all Convertible Preferred
Stock upon the closing of the offering and (ii) the exercise of outstanding
warrants into 168,952 shares of Common Stock upon the closing of the
offering 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 effected on October ,
1996, (iii) reflects the conversion of all outstanding shares of Convertible
Preferred Stock into an aggregate of 1,860,330 shares of Common Stock upon the
closing of the offering; (iv) assumes the exercise of outstanding warrants into
168,952 shares of Common Stock upon the closing of the offering; 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.
5
<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.
Some of the Company's competitors in the center-based segment have
substantially greater financial resources than the Company or have greater
name recognition. Many of the Company's competitors also offer child care at a
substantially lower price than the Company. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, or that competitive pressures faced by the Company will not have
a material adverse effect on its business, results of operations and financial
condition.
In the competition for corporate 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 could have a material adverse effect on
the Company's business, financial condition and results of operations as well
as its ability to 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. 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 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 Company's business, financial condition
and results of operations. See "Business--Growth Strategy."
6
<PAGE>
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. Certain 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. There can be no assurance that such
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."
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 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 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. 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
7
<PAGE>
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, 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
8
<PAGE>
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. 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 September 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
9
<PAGE>
the Securities Act. 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 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 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."
10
<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 September 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 September
30, 1996 under two mortgage notes consisting of $657,000 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 $386,000 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 September 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 mortgage notes from paying cash dividends
without the prior written consent of the lending institution and expects that
the terms of the revolving line of credit which the Company is currently
renegotiating will contain similar prohibitions.
11
<PAGE>
DILUTION
The Company's pro forma net tangible book value as of June 30, 1996 was
approximately $3.4 million or $1.45 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 June 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 June 30, 1996.... $1.45
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 June 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... % $ % $
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 June 30, 1996. As of June 30, 1996, the Company has reserved 276,918
shares of Common Stock for issuance upon exercise of outstanding options at a
weighted average exercise price of $2.31 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."
12
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 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 and the exercise of outstanding
warrants to purchase 168,952 shares of Common Stock and the sale 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>
JUNE 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT:
Line of credit......................................... $ 500 $500
Current portion of long-term debt and capital leases... 485 94
-------- ----
Total short-term debt................................ $ 985 594
LONG-TERM DEBT:
Note payable to ServiceMaster.......................... $ 2,625 --
Mortgage notes......................................... 1,574 548
Other long-term liabilities............................ 49 49
-------- ----
Total long-term debt................................. 4,248 597
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................................................ 18,606
Stockholders' equity (deficit):
Preferred Stock, $0.01 par value; shares
authorized;
no shares issued and outstanding, actual and as
adjusted..............................................
Common Stock, $0.01 par value; 3,000,000 shares
authorized;
330,426 issued and outstanding, actual; shares
issued
and outstanding, as adjusted(1)....................... 3
Additional paid-in capital............................. 63
Accumulated deficit.................................... (11,281)
-------- ----
Total stockholders' equity (deficit)................ (11,215)
-------- ----
Total capitalization................................. $ 11,639 $
======== ====
</TABLE>
- --------
(1) Based upon the number of shares outstanding as of June 30, 1996. Excludes
(i) 276,918 shares of Common Stock reserved for issuance upon exercise of
options outstanding with a weighted average exercise price of $2.31 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 option grants under the Company's Equity Incentive Plan. See
"Management--Stock Plans."
13
<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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------
1992 1993 1994 1995 1996(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $ 17,060 $ 23,812 $ 32,012 $ 43,693 $ 64,181
Cost of services........ 15,102 20,611 27,592 37,209 55,615
-------- -------- -------- -------- --------
Gross profit.......... 1,958 3,201 4,420 6,484 8,566
General and
administrative
expenses............... 2,130 2,285 2,783 3,739 4,660
Marketing and
development expenses... 775 749 795 1,435 1,716
Amortization of non-
compete agreements(2).. -- -- -- 80 1,680
-------- -------- -------- -------- --------
Income (loss) from
operations........... (947) 167 842 1,230 510
Interest income
(expense), net......... 58 (14) (17) 21 (194)
-------- -------- -------- -------- --------
Income (loss) before
income tax benefit... (889) 153 825 1,251 316
Income tax benefit(3)... -- -- 319 382 1,005
-------- -------- -------- -------- --------
Net income (loss)..... $ (889) $ 153 $ 1,144 $ 1,633 $ 1,321
======== ======== ======== ======== ========
Net income per
share(4)............... $ 0.51
========
Weighted average number
of common and common
equivalent shares(4)... 2,597
========
SELECTED OPERATING DATA:
Number of centers at
end of fiscal year..... 41 54 73 87 124
Licensed capacity at
end of fiscal year(5).. 3,484 4,198 6,239 7,270 12,638
Average utilization
rate(6)................ 72.5% 76.4% 75.2% 75.7% 76.2%
BALANCE SHEET DATA (AT
END OF FISCAL YEAR):
Working capital......... $ 1,204 $ 802 $ 545 $ 900 $ 954
Total assets............ 6,927 8,104 10,467 12,970 23,229
Long-term debt and
capital lease
obligations............ 767 718 12 749 4,248
Total stockholders'
deficit................ $(11,086) $(12,031) $(11,983) $(11,447) $(11,215)
</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. 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.
(4) Calculated on the basis described in Note 1 to Consolidated Financial
Statements.
(5) Represents the total capacity permitted under applicable state licenses.
(6) Calculated as total tuition revenue as a percentage of total potential
tuition revenue, assuming 100% full-time occupancy and the appropriate age
mix of children, for the applicable period.
14
<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
has become the leading provider of corporate-sponsored work-site child care
centers in the United States, with 129 work-site centers providing care to
more than 11,000 children. The Company believes that its 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 124 centers by June 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, gives priority enrollment to the children of
corporate sponsor employees, receives start-up or operating financial support
from the corporate sponsor and maintains profit-and-loss responsibility for
the operation of the center. Newly-opened corporate-sponsored centers
generally operate at a loss until sufficient utilization levels are achieved,
which can take up to one year or more. 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
Company does not sustain pre-opening or initial operating losses under the
management contract model. As of September 30, 1996, the Company operated 101
centers under the corporate sponsored model and 28 centers 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, revenues also
include management fees and reimbursable net expenses. In all cases, revenues
are recognized as services are performed. Tuition 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
15
<PAGE>
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 $97,000, and those
centers achieved an average operating profit (before center level depreciation
and any allocation of corporate overhead and interest) of approximately
$94,000 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.
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 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.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of net revenues for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net revenues............................................... 100.0% 100.0% 100.0%
Cost of services........................................... 86.2 85.2 86.6
----- ----- -----
Gross profit............................................. 13.8 14.8 13.4
General and administrative expenses........................ 8.7 8.6 7.3
Marketing and development expenses......................... 2.5 3.2 2.7
Amortization of non-compete agreements..................... 0.0 0.2 2.6
----- ----- -----
Income from operations................................... 2.6 2.8 0.8
Interest expense, net...................................... 0.0 0.0 0.3
----- ----- -----
Income before income tax benefit......................... 2.6 2.8 0.5
Income tax benefit......................................... 1.0 0.9 1.6
----- ----- -----
Net income............................................... 3.6% 3.7% 2.1%
===== ===== =====
Number of centers open at end of period.................. 73 87 124
</TABLE>
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. 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 $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
the result of the lower gross margins of the acquired GreenTree centers.
General and Administrative Expenses. General and administrative expenses
consist of regional and district management personnel, home office management
and corporate functions such as finance, human resources and purchasing.
General and administrative expenses increased $921,000 or 24.6%, to $4.7
million in fiscal 1996 from $3.7 million in fiscal 1995, primarily to support
the increased number of centers. During fiscal 1996, the Company instituted a
regional operating structure and hired three Regional Vice Presidents in order
to enhance regional operating efficiencies. As a percentage of net revenues,
general and administrative expenses declined to 7.3% in fiscal 1996 from 8.6%
in fiscal 1995, due primarily to the Company's ability to increase net
revenues without a commensurate increase in general and administration
expenses.
Marketing and Development Expenses. Marketing and development expenses are
primarily incurred in the development of new centers, particularly for sales
personnel compensation and travel, as well as marketing expenses for new and
existing centers. These expenses increased $281,000, or 19.6%, to $1.7 million
in fiscal 1996 from $1.4 million in fiscal 1995. Marketing and development
expenses as a percentage of net revenues decreased to 2.7% in fiscal 1996 from
3.3% in fiscal 1995, as a result of a reduction in marketing costs for new
centers, due primarily to the acquisition of 24 GreenTree centers, most of
which had established customer bases.
17
<PAGE>
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. If such
expenses were not recorded, 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. This increase is primarily the result
of the Company's ability to increase revenues without a commensurate increase
in operating expenses.
Interest Expense (Income), 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. 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 attributable to a full period of operations from the 19
centers opened in fiscal 1994, the opening by the Company of nine new centers
in fiscal 1995 (seven of which were corporate-sponsored and two 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 the 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.
General and Administrative Expenses. General and administrative expenses
increased $956,000, or 34.4%, to $3.7 million in fiscal 1995 from $2.8 million
in fiscal 1994, due primarily to increased staffing levels required to support
a larger number of centers. As a percentage of net revenues, general and
administrative expenses were 8.6% in fiscal 1995 compared to 8.7% in fiscal
1994.
Marketing and Development Expenses. Marketing and development expenses
increased $640,000, or 80.5%, to $l.4 million in fiscal 1995 from $795,000 in
fiscal 1994. As a percentage of net revenues, marketing and development
expenses increased to 3.3% in fiscal 1995 from 2.5% in fiscal 1994.
Approximately $470,000 of the increase is due to additions to the Company's
marketing and development personnel as a result of 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 for fiscal 1995, for which there was no comparable amount in fiscal
1994.
18
<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 Expense (Income), 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. 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. 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,
1995 1995 1996 1996
--------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues.............................. $11,932 $14,232 $18,271 $19,746
Cost of services.......................... 10,467 12,254 15,946 16,948
------- ------- ------- -------
Gross profit............................ 1,465 1,978 2,325 2,798
General and administrative expenses....... 897 1,098 1,191 1,474
Marketing and development expenses........ 362 398 469 487
Amortization of non-compete agreements.... 87 277 658 658
------- ------- ------- -------
Income from operations.................. 119 205 7 179
Interest income (expense), net............ 16 (14) (48) (148)
------- ------- ------- -------
Income before income tax benefit
(taxes)................................ 135 191 (41) 31
Income tax benefit (taxes)................ 430 604 (127) 98
------- ------- ------- -------
Net income (loss)....................... $ 565 $ 795 $ (168) $ 129
======= ======= ======= =======
</TABLE>
19
<PAGE>
<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
General and administrative expenses........ 711 808 879 1,341
Marketing and development expenses......... 277 355 380 423
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 tax benefit......... 200 356 528 167
Income tax benefit......................... 61 108 161 52
------ ------- ------- -------
Net income............................... $ 261 $ 464 $ 689 $ 219
====== ======= ======= =======
</TABLE>
In the fourth quarter of fiscal 1996, the Company incurred approximately
$84,000 in 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 general and
administrative expenses attributable to the write down of assets at certain
centers acquired prior to fiscal 1994, as well as 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 $2.0 million revolving line
of credit with Fleet National Bank.
The Company is currently renegotiating its revolving line of credit with
Fleet National Bank, with a proposed line of credit of $5.0 million, $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 is expected to have 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 $4.9 million during the year ended fiscal
1996, compared to $1.5 million in fiscal 1995. 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
20
<PAGE>
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 $4.8 million during fiscal 1996,
compared to $2.0 million in fiscal 1995. The fiscal 1996 amount included $3.1
million used in the GreenTree acquisition and $1.7 used to purchase fixed
assets, primarily to equip new child care centers.
Financing activities provided $363,000 in fiscal 1996 and used $87,000 in
fiscal 1995. 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.
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. 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.
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.
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 1997. 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.
21
<PAGE>
BUSINESS
OVERVIEW
Bright Horizons is the leading provider of corporate-sponsored work-site
child care services in the United States, operating 129 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. Since the end of fiscal 1992, Bright Horizons has grown from 41 to
129 centers, while revenues during that period increased at a 39% compound
annual rate from $17.1 million to $64.2 million. 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. There are relatively few
work-site or residential 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%
22
<PAGE>
Center-based child care has gained significant market share in the overall
child care market. 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 Bright Horizons and others
pioneered 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 dedicated to improving the
quality of care and developmental education provided for young
23
<PAGE>
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 compensation is more than 30% 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.
24
<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.
Increase Revenue from Existing Corporate Sponsors. Bright Horizons aims to
increase revenue from its corporate sponsor relationships by developing new
centers for existing sponsors who have multiple sites and offering additional
services at its existing centers. The Company is able to serve corporate
sponsors on a multi-site basis following the successful operation of an
initial Bright Horizons center. The Company currently operates child care
centers at multiple sites for 11 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.
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.
25
<PAGE>
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, enrollment guarantees and assistance with
start-up 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 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
26
<PAGE>
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.
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.
27
<PAGE>
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 whole language 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
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
28
<PAGE>
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 that the key competitive factors in the competition for
corporate sponsorship are reputation, quality of service, cost, the ability to
customize sponsorship arrangements and national scale. Many residential
center-based child care chains, some of which have divisions that compete for
corporate sponsorship opportunities, are larger and have substantially greater
financial resources than the Company. Other child care organizations focus
exclusively on the work-site segment of the child care market. The Company is
well-positioned to serve 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."
PROPERTIES
The following table summarizes the locations of the Company's centers by
state as of September 30, 1996:
<TABLE>
<CAPTION>
LOCATION NUMBER LOCATION NUMBER
-------- ------ -------- ------
<S> <C> <C> <C> <C>
California..................... 19 New Hampshire.................. 1
Connecticut.................... 10 New Jersey..................... 2
Delaware....................... 2 New Mexico..................... 1
District of Columbia........... 4 New York....................... 9
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>
29
<PAGE>
As of September 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......................................................... 10
1998......................................................... 9
1999......................................................... 16
2000 and later............................................... 66
</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 September 30, 1996, the Company employed approximately 3,700 employees
(including part-time and substitute teachers), of whom 72 were employed at
Bright Horizons home and regional offices, 19 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.
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.
30
<PAGE>
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.
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. The Company believes that no claims of which it is
currently aware are material to its business, financial condition or results
of operation. See "Risk Factors--Litigation."
31
<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
Gregg S. Newmark........... 38 Director
Donald J. Steiner.......... 56 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. From 1981 to 1982, Ms. Mason worked as a consultant with Booz, Allen
and Hamilton. In addition to serving as director of the Company, Ms. Mason
also is a director of Whole Foods, 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.
32
<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.
Mr. Newmark has been a director of the Company since 1990. Mr. Newmark is
currently managing director of William Blair Capital Partners, LLC and a
principal of William Blair & Co., LLC. Mr. Newmark joined both William Blair
Venture Management, predecessor to William Blair Capital Partners, and William
Blair & Co., LLC. in 1985.
Mr. Steiner has been a director of the Company since 1990. Mr. Steiner is a
General Partner of Boston Capital Ventures L.P. which he co-founded in 1983.
Mr. Steiner is also the Managing Director of The International Cornerstone
Group, a company that acquires and operates high quality consumer catalog
companies. Prior to founding Cornerstone in 1993, Mr. Steiner served as Vice
President of Business Development for the Gillette Company from 1977 to 1982
and as Executive Officer of Boston Capital Ventures Management from 1983 to
1993. Mr. Steiner is also a director of The International Cornerstone Group,
TravelSmith Outfitters and Frontgate which are consumer catalog companies. Mr.
Steiner is also a director of The Horizons Initiative.
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 nine. 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. Donald J. Steiner, John M. Reynolds and Gregg S. Newmark are
designated Class I directors and have been elected for a term expiring in 1997
and until their
33
<PAGE>
successors are elected and qualified; Joshua Bekenstein, Linda Mason and
Ernest C. Parizeau 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.
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 the cash 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 $1,474
Chief Operating Officer
</TABLE>
- --------
(1) The Company did not grant options, make restricted stock awards, grant any
stock appreciation rights or make long-term incentive payments to the
Named Executive Officers during fiscal 1996.
(2) Bonuses indicated were paid in fiscal 1996 and were based upon the
officer's performance in fiscal 1995.
(3) Consists of contributions made by the Company on behalf of the Named
Executive Officers to the Company's 401(k) Plan.
(4) Ms. Mason was on maternity leave or worked part-time for all of fiscal
1996.
34
<PAGE>
The table below sets forth information for the Named Executive Officers with
respect to option values at June 30, 1996. None of the Named Executive officers
exercised any options during the fiscal year 1996.
<TABLE>
<CAPTION>
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL-YEAR-END
------------------------------- ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (NUMBER) (NUMBER) ($) ($)
- ---- ------------- -------------- ---------------------------------
<S> <C> <C> <C> <C>
Roger H. Brown.......... 55,200 8,000
Linda A. Mason.......... 41,000 4,000
Stephen I. Dreier....... 22,640 6,760
Mary Ann Tocio.......... 22,200 7,200
</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
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.
As of September 30, 1996, options to purchase 303,071 shares of Common Stock
at a weighted average exercise price of $3.14 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
35
<PAGE>
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.
36
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 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>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1)(2)(3) NUMBER OF OFFERING(1)(2)(3)
----------------------- SHARES ----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ ------------ ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
The Bain Funds.......... 552,330 23.4% %
Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Bessemer Venture
Partners................ 450,112 19.1% %
1025 Old Country Road,
Suite 205
Westbury, NY 11590
Norwest Equity Partners
IV...................... 425,025 18.0% %
40 William Street, Suite
305
Wellesley, MA 02181
William Blair Venture
Partners................ 258,900 11.0% %
222 West Adams Street
Chicago, IL 60606
Boston Capital Ventures. 151,794 6.4% %
45 School Street
Boston, MA 02108
Family Ventures......... 76,634 3.3% %
c/o North American
Management Corp.
10 Post Office Square,
Suite 30
Boston, MA 02109
Joshua Bekenstein(4)+... 555,473 23.5% %
Ernest C. Parizeau(5)+.. 425,025 18.0% %
Gregg S. Newmark(6)+.... 258,900 11.0% %
Roger H. Brown(7)+*..... 259,707 10.8% %
Linda A. Mason(8)+*..... 245,507 10.2% %
Donald J. Steiner(9)+... 151,794 6.4% %
John M. Reynolds(10)+... 100,364 4.2% %
Stephen I. Dreier(11)*.. 22,640 ** **
Mary Ann Tocio(12)*..... 22,200 ** **
Robert S. Benson(13)+... 8,000 ** **
Dr. Sara Lawrence-
Lightfoot(14)+.......... 3,000 ** **
All Directors and
Executive Officers
as a Group (11
persons)(15)............ 1,848,103 73.6% %
</TABLE>
37
<PAGE>
- --------
+ 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) 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.
(5) 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.
(6) Includes 258,900 shares of Common Stock owned by certain of the funds of
William Blair Venture Partners, 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 55,200 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after September 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 September 30, 1996.
(8) Includes 41,000 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after September 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 4,000 shares of Common
Stock which are not exercisable within 60 days after September 30, 1996.
(9) Includes 151,794 shares of Common Stock owned by Boston Capital Ventures,
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.
(10) 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 September
30, 1996.
(11) Includes 22,640 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after September 30, 1996.
Excludes 6,760 shares of Common Stock which are not exercisable within 60
days after September 30, 1996.
(12) Includes 22,200 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after September 30, 1996.
Excludes 7,200 shares of Common Stock which are not exercisable within 60
days after September 30, 1996.
(13) Includes 1,000 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after September 30, 1996.
Excludes 2,000 shares of Common Stock which are not exercisable within 60
days after September 30, 1996.
(14) Includes 3,000 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after September 30, 1996.
Excludes 2,000 shares of Common Stock which are not exercisable within 60
days after September 30, 1996.
(15) Includes 150,040 shares of Common Stock subject to purchase upon exercise
of stock options exercisable within 60 days after September 30, 1996.
Excludes 29,960 shares of Common Stock which are not exercisable within
60 days after September 30, 1996.
38
<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. 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 Convertible Preferred Stock are entitled to require the
Company to register under the Securities Act of 1933 (the "Act") up to a total
of approximately 2,043,379 shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock or exercise of the Series C Warrants (the
"Registrable Shares"). See "Shares Eligible for Future Sale--Registration
Rights."
39
<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 BYLAW 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
40
<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 .
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
41
<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 certain stockholders,
including affiliates of the Company, who together own 2,164,809 shares of
Common Stock, 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
42
<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 Convertible Preferred Stock are entitled to require the
Company to register under the Securities Act of 1933 (the "Act") up to a total
of approximately 2,043,379 shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock or exercise of the Warrants (the "Registrable
Shares"). 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.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representative,
Alex. Brown & Sons Incorporated, 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....................................
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 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 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
Representative of the Underwriters, except to the extent being sold in the
offering. The Representative 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."
44
<PAGE>
The Representative of the Underwriters has 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 Representative 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.
45
<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 described in Note 8 to the financial
statements has not been consummated at October 29, 1996. When it has 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>
PRO FORMA
JUNE 30, (NOTE 7)
-------------------------- JUNE 30,
1995 1996 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 4,087,939 $ 4,583,257 $ 4,583,257
Accounts receivable, trade, net of
allowance for doubtful accounts of
$111,636 and $307,458 at June 30,
1995 and 1996, respectively....... 1,799,504 2,162,615 2,162,615
Prepaid expenses and other current
assets............................ 461,352 1,000,415 1,000,415
Deferred income taxes.............. 320,000 2,284,000 2,284,000
------------ ------------ ------------
Total current assets............. 6,668,795 10,030,287 10,030,287
Fixed assets, net.................... 4,701,859 8,206,073 8,206,073
Goodwill, net........................ 491,346 2,185,202 2,185,202
Other intangible assets, net......... 520,000 1,782,334 1,782,334
Other assets......................... 88,060 131,471 131,471
Deferred income taxes................ 500,000 894,000 894,000
------------ ------------ ------------
$ 12,970,060 $ 23,229,367 $ 23,229,367
============ ============ ============
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE
PREFERRED STOCK, AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Line of credit..................... $ -- $ 500,000 $ 500,000
Current portion of long-term debt
and obligations under
capital leases.................... 124,956 485,250 485,250
Accounts payable and accrued
expenses.......................... 3,457,203 4,771,808 4,771,808
Income taxes payable............... 33,452 87,856 87,856
Deferred revenue................... 2,153,478 3,231,446 3,231,446
------------ ------------ ------------
Total current liabilities........ 5,769,089 9,076,360 9,076,360
Long-term debt and obligations under
capital leases....................... 748,701 4,247,559 4,247,559
Accrued rent......................... 384,085 1,665,279 1,665,279
Other long-term liabilities.......... 6,917 6,917 6,917
Deferred revenue..................... -- 841,666 841,666
------------ ------------ ------------
6,908,792 15,837,781 15,837,781
------------ ------------ ------------
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 and $7,732,455 at June
30, 1995 and 1996, respectively,
none outstanding pro forma.......... 17,508,535 18,606,736 --
------------ ------------ ------------
Stockholders' equity (deficit):
Common stock, $.01 par value;
3,000,000 shares authorized;
320,740 and 330,426 shares issued
and outstanding at
June 30, 1995 and 1996,
respectively, and 2,190,756 shares
issued and outstanding pro forma.. 3,207 3,304 21,907
Additional paid-in capital......... 53,146 62,536 18,650,669
Accumulated deficit................ (11,503,620) (11,280,990) (11,280,990)
------------ ------------ ------------
Total stockholders' equity
(deficit)......................... (11,447,267) (11,215,150) 7,391,586
------------ ------------ ------------
Commitments (Note 12)................ -- -- --
------------ ------------ ------------
$ 12,970,060 $ 23,229,367 $ 23,229,367
============ ============ ============
</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>
YEAR ENDED JUNE 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues............................ $32,012,412 $43,693,026 $64,181,377
Cost of services........................ 27,592,521 37,208,535 55,614,948
----------- ----------- -----------
Gross profit.......................... 4,419,891 6,484,491 8,566,429
General and administrative expenses..... 2,782,566 3,739,095 4,660,488
Marketing and development expenses...... 794,738 1,435,423 1,715,724
Amortization of non-compete agreements.. -- 80,000 1,680,031
----------- ----------- -----------
Income from operations................ 842,587 1,229,973 510,186
Interest income......................... 37,945 99,210 97,544
Interest expense........................ (55,074) (78,549) (291,899)
----------- ----------- -----------
Income before income tax benefit...... 825,458 1,250,634 315,831
Income tax benefit...................... 319,000 382,000 1,005,000
----------- ----------- -----------
Net income............................ $ 1,144,458 $ 1,632,634 $ 1,320,831
=========== =========== ===========
Unaudited pro forma data (Note 1):
Net income per share.................... $ 0.51
===========
Weighted average number of common and
common equivalent shares............... 2,596,846
===========
</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.............. 1,063 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.................... 320,740 3,207 53,146 (11,503,620) (11,447,267)
Exercise of stock
options.............. 9,686 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.................... 330,426 $3,304 $62,536 $(11,280,990) $(11,215,150)
======= ====== ======= ============ ============
</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>
YEAR ENDED JUNE 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $1,144,458 $1,632,634 $1,320,831
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
Loss (gain) on disposal of fixed assets... 7,430 100,123 (23,448)
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)
Accounts receivable, trade................ (128,690) (895,360) 300,598
Prepaid expenses and other current
assets................................... 74,232 (139,164) (351,312)
Accounts payable and accrued expenses..... 732,369 215,200 663,921
Income taxes payable...................... 15,000 18,452 54,404
Deferred revenue.......................... 550,503 10,144 1,409,138
Accrued rent.............................. 1,407 (9,475) (68,252)
Other long-term liabilities............... (21,818) (2,666) --
---------- ---------- ----------
Total adjustments....................... 1,527,664 (140,503) 3,600,257
---------- ---------- ----------
Net cash provided by operating
activities............................. 2,672,122 1,492,131 4,921,088
---------- ---------- ----------
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)
Proceeds from disposal of fixed assets.... 9,947 58,777 32,725
(Increase) decrease in other assets....... (77,318) 209 (39,204)
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)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock.... 3,078 1,078 9,487
Net borrowings under line of credit....... -- -- 500,000
Principal payment of long-term debt and
obligations under capital leases......... (62,209) (87,607) (146,112)
---------- ---------- ----------
Net cash provided by (used in) financing
activities............................. (59,131) (86,529) 363,375
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................ 1,139,512 (555,997) 495,318
Cash and cash equivalents, beginning of
year....................................... 3,504,424 4,643,936 4,087,939
---------- ---------- ----------
Cash and cash equivalents, end of year..... $4,643,936 $4,087,939 $4,583,257
========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest..... $ 55,435 $ 78,549 $ 81,521
========== ========== ==========
Cash paid during the year for income taxes. $ 28,111 $ 70,284 $ 156,596
========== ========== ==========
</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'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.
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.
Revenues consist primarily of tuition paid by parents, supplemented in some
cases, by payments from corporate sponsors and, to a lesser extent, by
payments from government agencies. Revenues also include management fees and
reimbursable expenses paid by corporate sponsors. Tuition paid in advance is
recorded as deferred revenue and recognized when services are performed.
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.
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)
Intangibles--Goodwill is amortized on a straight-line basis over the
estimated period benefited, 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. At June 30, 1995 and 1996, accumulated amortization
of intangible assets was approximately $104,000 and $1,923,361, 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.
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.
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 was
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 was ascribed to contract rights acquired. 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.
F-8
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS--(CONTINUED)
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 ---------------------
LIVES (YEARS) 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
Land................................... -- $ 459,438 $ 821,938
Buildings.............................. 40 413,578 1,233,772
Furniture and fixtures................. 10 990,982 2,604,747
Office equipment....................... 5 1,162,879 1,625,219
Educational equipment.................. 3-7 1,381,504 1,754,029
Playground equipment................... 15 1,003,875 1,091,921
Leasehold improvements................. 3/Life of lease 1,600,087 2,341,541
Automobiles............................ 5 199,538 228,417
Software............................... 3 147,249 168,573
---------- ----------
7,359,130 11,870,157
Less--accumulated depreciation and
amortization.......................... 2,657,271 3,664,084
---------- ----------
$4,701,859 $8,206,073
========== ==========
</TABLE>
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,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Accounts payable....................................... $ 791,064 $ 379,212
Accrued payroll and employee benefits.................. 1,771,261 2,867,750
Accrued other expenses................................. 894,878 1,524,846
---------- ----------
$3,457,203 $4,771,808
========== ==========
</TABLE>
F-9
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 of 8.25% (prime rate 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
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>
F-10
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
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>
JUNE 30,
-----------------------
1995 1996
----------- -----------
<S> <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......................... $ 3,552,498 $ 3,751,698
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......................... 6,657,979 7,056,379
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......................... 7,298,058 7,798,659
----------- -----------
$17,508,535 $18,606,736
=========== ===========
</TABLE>
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.
F-11
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK--(CONTINUED)
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 AND REVERSE STOCK SPLIT
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.
On October 17, 1996, the Board of Directors authorized a 1-for-5 reverse
stock split of the Company's common stock. 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.
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 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).
F-12
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLAN--(CONTINUED)
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..................................... (19,117) $1.00- 5.00
Options exercised...................................... (9,686) $0.50- 1.25
-------
Options outstanding at June 30, 1996................... 276,918
=======
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.
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>
F-13
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
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 realizability 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:
<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>
F-14
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
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 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 (UNAUDITED)
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.
F-15
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED)--(CONTINUED)
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.
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
General and administrative
expenses..................... 697,927 763,641 900,587
Marketing and development
expenses..................... 217,934 282,886 367,884
----------- ------------ -----------
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--Revenue is recognized as services are performed.
Tuition paid in advance is recorded as deferred revenue and recognized when
services are performed.
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.
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
General and administrative
expenses....................... 4,660 265 49(c) 4,974
Marketing and development
expenses....................... 1,716 183 -- 1,899
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............. 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.
(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.
(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.............................................................. 6
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Dilution.................................................................. 12
Capitalization............................................................ 13
Selected Financial and Operating Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 22
Management................................................................ 32
Principal and Selling Stockholders........................................ 37
Certain Transactions...................................................... 39
Description of Capital Stock.............................................. 40
Shares Eligible for Future Sale........................................... 41
Underwriting.............................................................. 44
Validity of Common Stock.................................................. 45
Experts................................................................... 45
Additional Information.................................................... 45
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
, 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 issues
and outstanding 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
160,340 shares of the Company's Common Stock at a weighted average exercise
price of $ . shares have been issued upon exercise of such options.
The options issued pursuant to paragraph above, and any shares issued upon
the exercise of such options, 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. 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 become
effective upon 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
21* -- Subsidiaries
23.1* -- Consent of Ropes & Gray (included in Exhibit 5)
23.2 -- Consent of Price Waterhouse LLP
24 -- Power of Attorney (see page II-3)
27 -- Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(b) The following Financial Statement Schedules of the Registrant for the
Three Years Ended June 3, 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)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.
(2)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-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cambridge, MA on this
28th day of October, 1996.
Bright Horizons Children's Centers,
Inc.
By: /s/ Roger H. Brown
-----------------------------------
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
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby authorizes Roger H. Brown and Stephen I. Dreier, and each of
them, with full power to them, to execute in the name and on behalf of such
person any amendment (including any post-effective amendment) to this
Registration Statement (or any other registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act) and to file the same, with exhibits thereto, and other
documents in connection therewith, making such changes in this Registration
Statement as the person(s) so acting deems appropriate, and appoints each of
such persons, each with full power of substitution, attorney-in-fact to sign
any amendment (including any post-effective amendment) to this Registration
Statement (or any other registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act)
and to file the same, with exhibits thereto, and other documents in connection
therein.
SIGNATURE TITLE DATE
/s/ Roger H. Brown Chairman of the October 28,
- ------------------------------------- Board and Chief 1996
ROGER H. BROWN Executive Officer
(Principal
Executive Officer)
/s/ Stephen I. Dreier Chief Financial October 28,
- ------------------------------------- Officer, Secretary 1996
STEPHEN I. DREIER and Treasurer
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Joshua Bekenstein Director October 28,
- ------------------------------------- 1996
JOSHUA BEKENSTEIN
/s/ Robert S. Benson Director October 28,
- ------------------------------------- 1996
ROBERT S. BENSON
II-3
<PAGE>
SIGNATURE TITLE DATE
/s/ John M. Reynolds Director October 28,
- ------------------------------------- 1996
JOHN M. REYNOLDS
/s/ Sara Lawrence-Lightfoot Director October 28,
- ------------------------------------- 1996
SARA LAWRENCE-LIGHTFOOT
/s/ Ernest C. Parizeau Director October 28,
- ------------------------------------- 1996
ERNEST C. PARIZEAU
/s/ Gregg S. Newmark Director October 28,
- ------------------------------------- 1996
GREGG S. NEWMARK
/s/ Donald J. Steiner Director October 28,
- ------------------------------------- 1996
DONALD J. STEINER
/s/ Linda A. Mason Director October 28,
- ------------------------------------- 1996
LINDA A. MASON
II-4
<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 (to become effective
upon 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
21* Subsidiaries
23.1* Consent of Ropes & Gray (included in Exhibit 5)
23.2 Consent of Price Waterhouse LLP
24 Power of Attorney (See page II-3)
27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
------
<C> <S> <C>
ARTICLE 1 - STOCKHOLDERS
1.1 Place of Meetings....................................... 1
1.2 Annual Meeting.......................................... 1
1.3 Special Meeting......................................... 1
1.4 Notice of Meetings...................................... 1
1.5 Voting List............................................. 1
1.6 Quorum.................................................. 2
1.7 Adjournments............................................ 2
1.8 Voting and Proxies...................................... 2
1.9 Action at Meeting....................................... 2
1.10 Nomination of Directors................................. 2
1.11 Notice of Business at Annual Meetings................... 3
1.12 Action without Meeting.................................. 4
1.13 Organization............................................ 4
ARTICLE 2 - DIRECTORS................................................ 4
2.1 General Powers.......................................... 4
2.2 Number; Election and Qualification...................... 4
2.3 Classes of Directors.................................... 4
2.4 Terms of Office......................................... 5
2.5 Allocation of Directors Among Classes in the Event of
Increases or Decreases in the Number of Directors....... 5
2.6 Vacancies............................................... 5
2.7 Resignation............................................. 5
2.8 Regular Meetings........................................ 5
2.9 Special Meetings........................................ 6
2.10 Notice of Special Meetings.............................. 6
2.11 Meetings by Telephone Conference Calls.................. 6
2.12 Quorum.................................................. 6
2.13 Action at Meeting....................................... 6
2.14 Action by Consent....................................... 6
2.15 Removal................................................. 7
2.16 Committees.............................................. 7
2.17 Compensation of Directors............................... 7
ARTICLE 3 - OFFICERS................................................. 7
3.1 Enumeration............................................. 7
3.2 Election................................................ 7
3.3 Qualification........................................... 7
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
3.4 Tenure.................................................. 8
3.5 Resignation and Removal................................. 8
3.6 Vacancies............................................... 8
3.7 Chairman of the Board and Vice Chairman of the Board.... 8
3.8 President............................................... 8
3.9 Vice Presidents......................................... 8
3.10 Secretary and Assistant Secretaries..................... 9
3.11 Treasurer and Assistant Treasurers...................... 9
3.12 Salaries................................................10
ARTICLE 4 - CAPITAL STOCK............................................10
4.1 Issuance of Stock.......................................10
4.2 Certificates of Stock...................................10
4.3 Transfers...............................................10
4.4 Lost, Stolen or Destroyed Certificates..................10
4.5 Record Date.............................................11
ARTICLE 5 - GENERAL PROVISIONS.......................................11
5.1 Fiscal Year.............................................11
5.2 Corporate Seal..........................................11
5.3 Waiver of Notice........................................11
5.4 Voting of Securities....................................11
5.5 Evidence of Authority...................................12
5.6 Certificate of Incorporation............................12
5.7 Transactions with Interested Parties....................12
5.8 Severability............................................12
5.9 Pronouns................................................12
ARTICLE 6 - AMENDMENTS...............................................13
6.1 By the Board of Directors...............................13
6.2 By the Stockholders.....................................13
ii
</TABLE>
<PAGE>
ARTICLE 1 - STOCKHOLDERS
------------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at
-----------------
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held at 10:00 a.m. on the second
Tuesday in October each year (unless that day be a legal holiday in the place
where the meeting is to be held in which case the meeting shall be held at the
same hour on the next succeeding day not a legal holiday) or at such other date
and time as shall be fixed by the Board of Directors or the President and stated
in the notice of the meeting. If no annual meeting is held in accordance with
the foregoing provisions, the Board of Directors shall cause the meeting to be
held as soon thereafter as convenient. If no annual meeting is held in
accordance with the foregoing provisions, a special meeting may be held in lieu
of the annual meeting, and any action taken at that special meeting shall have
the same effect as if it had been taken at the annual meeting, and in such case
all references in these By-Laws to the annual meeting of stockholders shall be
deemed to refer to such special meeting.
1.3 Special Meeting. Special meetings of stockholders may be called
---------------
at any time by the Chairman of the Board of Directors, the Chief Executive
Officer (or, if there is no Chief Executive Officer, the President) or the Board
of Directors. Business transacted at any special meeting of stockholders shall
be limited to matters relating to the purpose or purposes stated in the notice
of meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is
to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
<PAGE>
1.6 Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to
------------
any other time and to any other place at which a meeting of stockholders may be
held under these By-Laws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no stockholder
is present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for
------------------
each share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
by the General Corporation Law of the State of Delaware, the Certificate of
Incorporation or these By-Laws. Each stockholder of record entitled to vote at
a meeting of stockholders may vote or express such consent or dissent in person
or may authorize another person or persons to vote or act for him by written
proxy executed by the stockholder or his authorized agent and delivered to the
Secretary of the corporation. No such proxy shall be voted or acted upon after
three years from the date of its execution, unless the proxy expressly provides
for a longer period.
1.9 Action at Meeting. When a quorum is present at any meeting, the
-----------------
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. Any election by stockholders shall be
determined by a plurality of the votes cast by the stockholders entitled to vote
at the election.
1.10 Nomination of Directors. Only persons who are nominated in
-----------------------
accordance with the following procedures shall be eligible for election as
directors. Nomination for election to the Board of Directors of the corporation
at a meeting of stockholders may be made by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this Section
1.10. Such nominations, other than those made by or on behalf of the Board of
Directors, shall be made by notice in writing delivered or mailed by first class
United States mail, postage prepaid, to the Secretary, and received not less
than 60 days, nor more than 90 days prior to such meeting; provided, however,
-------- -------
that if less than 70 days' notice or prior public disclosure of the date of the
2
<PAGE>
meeting is given to stockholders, such nomination shall have been mailed or
delivered to the Secretary not later than the close of business on the 10th day
following the date on which the notice of the meeting was mailed or such public
disclosure was made, whichever occurs first. Such notice shall set forth (a) as
to each proposed nominee (i) the name, age, business address and, if known,
residence address of each such nominee, (ii) the principal occupation or
employment of each such nominee, (iii) the number of shares of stock of the
corporation which are beneficially owned by each such nominee, and (iv) any
other information concerning the nominee that must be disclosed as to nominees
in proxy solicitations pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to be named as
a nominee and to serve as a director if elected); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the corporation's
books, of such stockholder and (ii) the class and number of shares of the
corporation which are beneficially owned by such stockholder. The corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the eligibility of such
proposed nominee to serve as a director of the corporation.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
1.11 Notice of Business at Annual Meetings. At an annual meeting of
-------------------------------------
the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, (c) otherwise properly brought before an annual meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, if such business relates to the election of directors of the
corporation, the procedures in Section 1.10 must be complied with. If such
business relates to any other matter, the stockholder must have given timely
notice thereof in writing to the Secretary. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 70 days' notice
-------- -------
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever occurs first. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in these By-Laws to the
3
<PAGE>
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section 1.11 and except that
any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or
any successor provision) promulgated under the Securities Exchange Act of 1934,
as amended, and is to be included in the corporation's proxy statement for an
annual meeting of stockholders shall be deemed to comply with the requirements
of this Section 1.11.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 1.11, and if he should so
determine, the chairman shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
1.12 Action without Meeting. Stockholders may not take any action
----------------------
by written consent in lieu of a meeting.
1.13 Organization. The Chairman of the Board, or in his absence the
------------
Vice Chairman of the Board designated by the Chairman of the Board, or the
President, in the order named, shall call meetings of the stockholders to order,
and act as chairman of such meeting; provided, however, that the Board of
-------- -------
Directors may appoint any stockholder to act as chairman of any meeting in the
absence of the Chairman of the Board. The Secretary of the corporation shall
act as secretary at all meetings of the stockholders; but in the absence of the
Secretary at any meeting of the stockholders, the presiding officer may appoint
any person to act as secretary of the meeting.
ARTICLE 2 - DIRECTORS
---------------------
2.1 General Powers. The business and affairs of the corporation
--------------
shall be managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the corporation except as otherwise provided by
law, the Certificate of Incorporation or these By-Laws. In the event of a
vacancy in the Board of Directors, the remaining directors, except as otherwise
provided by law, may exercise the powers of the full Board until the vacancy is
filled.
2.2 Number; Election and Qualification. The number of directors
----------------------------------
which shall constitute the whole Board of Directors shall be determined by
resolution of the Board of Directors, but in no event shall be less than three.
The number of directors may be decreased at any time and from time to time by a
majority of the directors then in office, but only to eliminate vacancies
existing by reason of the death, resignation, removal or expiration of the term
of one or more directors. The directors shall be elected at the annual meeting
of stockholders by such stockholders as have the right to vote on such election.
Directors need not be stockholders of the corporation.
4
<PAGE>
2.3 Classes of Directors. The Board of Directors shall be and is
--------------------
divided into three classes: Class I, Class II and Class III. No one class shall
have more than one director more than any other class. If a fraction is
contained in the quotient arrived at by dividing the designated number of
directors by three, then, if such fraction is one-third, the extra director
shall be a member of Class I, and if such fraction is two-thirds, one of the
extra directors shall be a member of Class I and one of the extra directors
shall be a member of Class II, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
2.4 Terms of Office. Except as otherwise provided in the Certificate
---------------
of Incorporation or these By-Laws, each director shall serve for a term ending
on the date of the third annual meeting following the annual meeting at which
such director was elected; provided, that each initial director in Class I shall
--------
serve for a term ending on the date of the annual meeting of stockholders in
1997; each initial director in Class II shall serve for a term ending on the
date of the annual meeting of stockholders in 1998; and each initial director in
Class III shall serve for a term ending on the date of the annual meeting of
stockholders in 1999; and provided further, that the term of each director shall
-------- -------
be subject to the election and qualification of his successor and to his earlier
death, resignation or removal.
2.5 Allocation of Directors Among Classes in the Event of Increases
----------------------------------------------------- ---------
or Decreases in the Number of Directors. In the event of any increase or
- ---------------------------------------
decrease in the authorized number of directors, (i) each director then serving
as such shall nevertheless continue as a director of the class of which he is a
member and (ii) the newly created or eliminated directorships resulting from
such increase or decrease shall be apportioned by the Board of Directors among
the three classes of directors so as to ensure that no one class has more than
one director more than any other class. To the extent possible, consistent with
the foregoing rule, any newly created directorships shall be added to those
classes whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
2.6 Vacancies. Any vacancy in the Board of Directors, however
---------
occurring, including a vacancy resulting from an enlargement of the Board, shall
be filled only by vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. A director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office,
and a director chosen to fill a position resulting from an increase in the
number of directors shall hold office until the next election of the class for
which such director shall have been chosen, subject to the election and
qualification of his successor and to his earlier death, resignation or removal.
2.7 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
5
<PAGE>
2.8 Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held without notice at such time and place, either within or without the
State of Delaware, as shall be determined from time to time by the Board of
Directors; provided, that any director who is absent when such a determination
--------
is made shall be given notice of the determination. A regular meeting of the
Board of Directors may be held without notice immediately after and at the
same place as the annual meeting of stockholders.
2.9 Special Meetings. Special meetings of the Board of Directors may
----------------
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board, President, two or more
directors, or by one director in the event that there is only a single director
in office.
2.10 Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 24 hours in advance of the meeting, (ii) by sending a telegram, telecopy,
or telex, or delivering written notice by hand, to his last known business or
home address at least 24 hours in advance of the meeting, or (iii) by mailing
written notice to his last known business or home address at least 72 hours in
advance of the meeting. A notice or waiver of notice of a special meeting of
the Board of Directors need not specify the purposes of the meeting.
2.11 Meetings by Telephone Conference Calls. Directors or any
--------------------------------------
members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall constitute presence in person at such meeting.
2.12 Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
-------- -------
(1/3) of the number of directors so fixed constitute a quorum. In the absence
of a quorum at any such meeting, a majority of the directors present may adjourn
the meeting from time to time without further notice, other than announcement at
the meeting, until a quorum shall be present.
2.13 Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.
2.14 Action by Consent. Any action required or permitted to be taken
-----------------
at any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in
6
<PAGE>
writing, and the written consents are filed with the minutes of proceedings of
the Board or committee.
2.15 Removal. Directors of the corporation may be removed only for
-------
cause by the affirmative vote of the holders of two-thirds of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote.
2.16 Committees. The Board of Directors may, by resolution passed by
----------
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members of the committee present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation and may authorize the
seal of the corporation to be affixed to all papers which may require it. Each
such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by the directors or in such rules, its
business shall be conducted as nearly as possible in the same manner as is
provided in these By-Laws for the Board of Directors.
2.17 Compensation of Directors. Directors may be paid such
-------------------------
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
ARTICLE 3 - OFFICERS
--------------------
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be elected
--------
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
7
<PAGE>
3.3 Qualification. No officer need be a stockholder. Any two or
-------------
more offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5 Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring
---------
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 Chairman of the Board and Vice Chairman of the Board. The Board
----------------------------------------------------
of Directors may appoint a Chairman of the Board. If the Board of Directors
appoints a Chairman of the Board, he shall perform such duties and possess such
powers as are assigned to him by the Board of Directors. If the Board of
Directors appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him by the Board
of Directors.
3.8 President. The President shall, subject to the direction of the
---------
Board of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders and, if he is a director, at all
meetings of the Board of Directors. Unless the Board of Directors has
designated the Chairman of the Board or another officer as Chief Executive
Officer, the President shall be the Chief Executive Officer of the corporation.
The President shall perform such other
8
<PAGE>
duties and shall have such other powers as the Board of Directors may from time
to time prescribe.
3.9 Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.10 Secretary and Assistant Secretaries. The Secretary shall perform
-----------------------------------
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
Secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers as
the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting of
stockholders or directors, the person presiding at the meeting shall designate a
temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform
----------------------------------
such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the President. In addition, the Treasurer
shall perform such duties and have such powers as are incident to the office of
Treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
9
<PAGE>
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 4 - CAPITAL STOCK
-------------------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation
---------------------
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or
in the name of the corporation by, the Chairman or Vice Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any restriction on
transfer pursuant to the Certificate of Incorporation, the By-Laws, applicable
securities laws or any agreement among any number of stockholders or among such
holders and the corporation shall have conspicuously noted on the face or back
of the certificate either the full text of the restriction or a statement of the
existence of such restriction.
4.3 Transfers. Except as otherwise established by rules and
---------
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the books of the corporation by the
surrender to the corporation or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or the authenticity of signature as the corporation or its transfer
agent may reasonably require. Except as may be otherwise required by law, by
the Certificate of Incorporation or by these By-Laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the
10
<PAGE>
requirements of these By-Laws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue
--------------------------------------
a new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such
indemnity as the Board of Directors may require for the protection of the
corporation or any transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as
-----------
a record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
- -------- -------
adjourned meeting.
ARTICLE 5 - GENERAL PROVISIONS
------------------------------
5.1 Fiscal Year. Except as from time to time otherwise designated by
-----------
the Board of Directors, the fiscal year of the corporation shall begin on the
first day of [July] in each year and end on the last day of [June] in each year.
5.2 Corporate Seal. The corporate seal shall be in such form as
--------------
shall be approved by the Board of Directors.
5.3 Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
11
<PAGE>
5.4 Voting of Securities. Except as the directors may otherwise
--------------------
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant
----------------------
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a committee or any officer or representative of the corporation
shall, as to all persons who rely on the certificate in good faith, be
conclusive evidence of such action.
5.6 Certificate of Incorporation. All references in these By-Laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as
amended or restated and in effect from time to time.
5.7 Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence of
a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
12
<PAGE>
5.8 Severability. Any determination that any provision of these By-
------------
Laws is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.
5.9 Pronouns. All pronouns used in these By-Laws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 6 - AMENDMENTS
----------------------
6.1 By the Board of Directors. These By-Laws may be altered, amended
-------------------------
or repealed or new By-Laws may be adopted by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
6.2 By the Stockholders. Notwithstanding any other provision of law,
-------------------
the Certificate of Incorporation or these By-Laws, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the shares of
the capital stock of the corporation issued and outstanding and entitled to vote
shall be required to alter, amend or repeal any provision of these By-Laws or to
adopt new By-Laws.
13
<PAGE>
PURCHASE AGREEMENT
Dated
October 12, 1990
among
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.,
a Delaware corporation (the "Company"),
JOHN M. REYNOLDS, ANNE WHITMAN and DOUGLAS WOODEN
(the "Founders")
and
ROGER H. BROWN and LINDA A. MASON (the "Officers")
and
the investing entities whose names appear at the end hereof
(the "Investors")
INTRODUCTION
The Company wishes to issue and sell and the Investors wish to purchase
shares of the Series C Convertible Preferred Stock, $.01 par value (the "Series
C Preferred Stock"), of the Company and warrants (the "Warrants") to purchase
shares of the Company's Common Stock, $.01 par value ("Common Stock").
TERMS AND CONDITIONS
ARTICLE I. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company (which term shall include for the purpose of this Article I any
subsidiary of the Company unless the context otherwise requires) represents and
warrants to the Investors that:
Section 1.01. Corporate Existence and Power; Certificate of Incorporation.
------------ -----------------------------------------------------------
The Company is a corporation duly incorporate validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has full
corporate and other power and authority to conduct its business and own its
properties as now conducted and owned. The Company is duly licensed or qualified
as a foreign corporation authorized to do business in each jurisdiction, except
in the
<PAGE>
Commonwealth of Virginia, wherein the character of the property owned or leased,
or the nature of the activities conducted, by it makes such qualification
necessary, except where the failure to so qualify does not materially affect the
business, properties or condition of the Company. The Company has no
subsidiaries and owns no capital stock or other securities of any other entity,
except that the Company holds all of the issued and outstanding capital stock of
Bright Horizons of Glastonbury, Inc., a Connecticut corporation. True and
correct copies of the Certificate of Incorporation and By-Laws of the Company as
now in effect have been furnished to the Investors or their counsel.
Section 1.02. Power and Authority of Company Relative to this Transaction.
------------ -----------------------------------------------------------
The Company has full power and authority and has taken all required corporate
and other action necessary to permit it to execute and deliver this Agreement
and to carry out the terms of this Agreement and all other documents or
instruments required hereby, including the issuance and sale of the Series C
Preferred Stock and the Warrants to the Investors, and none of such actions will
violate any provision of the Certificate of Incorporation or By-Laws of the
Company, or any provision of law, or will result in the breach of or constitute
a default under any agreement or instrument to which the Company is a party or
by which it is bound.
Section 1.03. Financial Statements. The Company has furnished to the
------------ --------------------
Investors a draft of the audited balance sheet of the Company as of June 30,
1990, and the related statements of operations, stockholders' equity and changes
in financial position of the Company for the year ended June 30, 1990 and the
unaudited balance sheet of the Company as of August 31, 1990 (the "Balance
Sheet") and the related statements of operations, stockholders, equity and
changes in financial position of the Company for the two months ended August 31,
1990. All such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied and fairly present
the financial position of the Company as of June 30, 1990 and August 31, 1990,
respectively, and the results of operations and changes in financial position
for the year ended June 30,1990 and the two months ended August 31, 1990,
respectively. Since the date of the Balance Sheet, (i) there has been no change
in the assets, liabilities or financial condition of the Company from that
reflected in the Balance Sheet except for changes in the ordinary course of
business which in the aggregate have not been materially adverse and (ii) none
of the business, prospects, financial condition, operations, property and
affairs of the Company has been materially adversely affected by any occurrence
or development, individually or in the aggregate, whether or not insured
against.
Section 1.04. Events Subsequent to the Date of the Balance Sheet. Except
------------ --------------------------------------------------
as set forth on Exhibit 1.04, since the date of the Balance Sheet, the Company
------------
has not (i) issued any stock, bond or other corporate security, (ii) borrowed
any amount or incurred or become subject to any liability (absolute, accrued or
contingent), except current liabilities incurred and liabilities under contracts
entered into in the ordinary course of business, (iii) discharged or satisfied
any lien or encumbrance or incurred or paid any obligation or liability
(absolute, accrued or contingent) other than current liabilities shown on the
Balance Sheet in the ordinary course of business, (iv) declared or made any
payment or distribution to stockholders or purchased or redeemed any shares of
its
-2-
<PAGE>
capital stock or other security, (v) mortgaged, pledged or subjected to lien any
of its assets, tangible or intangible, other than liens of current real property
taxes not yet due and payable, (vi) sold, assigned or transferred any of its
tangible assets except in the ordinary course of business, or cancelled any debt
or claim, (vii) sold, assigned, transferred or granted any exclusive license
with respect to any patent, trademark, trade name, service mark, copyright,
trade secret or other intangible asset, (viii) suffered any loss of property or
waived any right of substantial value whether or not in the ordinary course of
business, (ix) made any change in officer compensation except in the ordinary
course of business and consistent with past practice, (x) made any material
change in the manner of business or operations of the Company, (xi) entered into
any transaction except in the ordinary course of business or as otherwise
contemplated hereby or (xii) entered into any commitment (contingent or
otherwise) to do any of the foregoing.
Section 1.05. Litigation. There are no suits, proceedings or governmental
------------ ----------
investigations pending or threatened in writing against or pertaining to the
Company or any of the Founders or Officers in connection with the business or
affairs of the Company, and the Company knows of no basis for the successful
prosecution of any such suit, proceeding, or investigation. Except as set forth
in Exhibit 1.05, the Company has not received written notice of any suit,
------------
proceeding or governmental investigation against the Company since the date of
its incorporation.
Section 1.06. Titles. Except as set forth in Exhibit 1.06, the Company
------------ ------ ------------
has good and marketable title to all of the properties and assets on the Balance
Sheet or acquired by it since the date thereof (other than properties and assets
disposed of in the ordinary course of business since the date of the Balance
Sheet) free and clear of all mortgages, liens and encumbrances. The Company
enjoys quiet possession under all leases to which it is a party as lessee, and
all such leases are valid, subsisting and in full force and effect.
Section 1.07. Tax Returns and Payments. The Company has properly filed
------------ ------------------------
all necessary federal, state and local tax returns and paid all federal, state
and local taxes shown to be due thereon.
Section 1.08. Licenses, Compliance with Law, Other Agreements, etc. The
------------ ----------------------------------------------------
Company has all necessary franchises, permits, licenses and other rights to
allow it to conduct its business as presently conducted and, except as set forth
on Exhibit 1.08, as proposed to be conducted, and is not in violation of any
order or decree of any court, or of any law, order or regulation of any
governmental authority, or of the terms of any of its franchises, licenses or
permits, or of the provisions of its Certificate of Incorporation or By-Laws or
of any contract or agreement to which it is a party or by which it may be bound,
and neither this Agreement nor the transactions contemplated hereby will result
in any such violation.
Section 1.09. Disclosure. Neither this Agreement nor any other written
------------ ----------
statement, including, without limitation, the Business Plan of the Company dated
August, 1990 (the "Business Plan"), furnished by or on behalf of the Company to
the Investors in connection with this Agreement and the transactions
contemplated hereby contains any untrue statement of any
-3-
<PAGE>
material fact or omits to state any material fact necessary in order to make the
statements contained herein or therein complete and not misleading. There is no
fact known to the Company which materially adversely affects or in the future
may (so far as the Company can now reasonably foresee) materially adversely
affect the business, operations, affairs or condition of the Company or any of
its properties which has not been set forth in this Agreement or in an Exhibit
hereto or in the other documents, certificates or written statements heretofore
furnished to the Investors by or on behalf of the Company in connection with the
transactions contemplated hereby.
Section 1.10. Government Approvals. Each order, consent, approval or
------------ --------------------
authorization of, or declaration or filing with, any governmental authority
necessary in connection with the execution and delivery of this Agreement, or
the negotiation, offer, issue, sale and delivery of the Series C Preferred Stock
and the Warrants pursuant hereto has been obtained or made and is in full force
and effect.
Section 1.11. Capitalization. The authorized capital of the Company
------------ --------------
consists of 15,000,000 shares of Common Stock, 600,000 shares of Series A
Convertible Preferred Stock, $.01 par value ("Series A Preferred Stock"),
600,000 shares of Series B Convertible Preferred Stock, $.01 par value ("Series
B Preferred Stock") and 553,663 shares of Series C Convertible Preferred Stock,
$.01 par value ("Series C Preferred Stock"), of which 1,439,850 shares of Common
Stock, 600,000 shares of Series A Preferred Stock and 600,000 shares of Series B
Preferred Stock are issued and outstanding and owned of record by the persons
listed on Exhibit 1.11 hereto. The Series A Preferred Stock, the Series B
------------
Preferred Stock and the Series C Preferred Stock are hereinafter collectively
referred to as the "Preferred Stock". After the Closing contemplated by this
Agreement, 553,663 shares of Series C Preferred Stock will be issued and
outstanding, all of which will be held by the Investors and the officers. The
Company has reserved the following shares of Common Stock: (i) 1,060,150 shares
for issuance upon exercise of employee stock options under the Company's 1987
Stock Plan, (ii) 3,000,000 shares of issuance upon conversion of the Series A
Preferred Stock, (iii) 3,000,000 shares for issuance upon conversion of the
Series B Preferred Stock, (iv) 2,768,315 shares for issuance upon conversion of
the Series C Preferred Stock, (v) 415,245 shares for issuance upon exercise of
the warrants and (vi) 420,000 shares of Common Stock for issuance upon exercise
of warrants (the "Bridge Warrants") to purchase shares of Common Stock issued by
the Company on July 13, 1990 to certain of the Investors, as listed in Exhibit
-------
1.11. As far as the Company is aware, there are no existing options, warrants,
- ----
calls, pledges, liens, transfer restrictions (other than those imposed by
federal and state securities laws) or commitments of any character relating to
any issued or unissued shares of the Company, except as set forth in this
Agreement, the Stockholders Agreement referred to in Section 6.03 and Exhibit
-------
1.11 hereto. There are no preemptive or other preferential rights applicable to
- ----
the issuance and sale the Company's Preferred Stock or Common Stock, except as
set forth in this Agreement, in the Series B Preferred Stock Purchase Agreement
dated October 12, 1988 (the "Series B Purchase Agreement") between the Company,
the Founders, the Officers, the purchasers of Series B Preferred Stock named
therein (the "Series B Investors') and the purchasers of Series A Preferred
Stock (the "Series A Investors") and in
-4-
<PAGE>
Exhibit 1.11 hereto. All of the outstanding Common Stock, Series A Preferred
- ------------
Stock and Series B Preferred Stock is, and upon issuance and payment therefor in
accordance with the terms of this Agreement, all of the authorized Series C
Preferred Stock and the Warrants to be issued hereunder and the Common Stock
issuable upon exercise of the Warrants, will be, validly issued, fully-paid and
nonassessable. Assuming the accuracy of the representations of the Investors,
the Series A Investors and the Series B Investors made to the Company, all
shares of the Preferred Stock, Common Stock and the Warrants have been issued in
compliance with applicable Federal and state securities laws or exemptions
therefrom. Except as provided in this Agreement, in the Series B Purchase
Agreement and in Exhibit 1.11 hereto, no registration rights under the
------------
Securities Act of 1933, as amended (the "1933 Act"), have been granted by the
Company with respect to shares of its capital stock.
Section 1.12. Patents, Trademarks, etc. The Company owns or possesses all
------------ ------------------------
patents, trademarks, service marks, trade names, copyrights or licenses or
rights to the foregoing necessary for the conduct the Company's business as
presently conducted and as proposed to be conducted, without any known conflict
with the rights or asserted rights of others.
Section 1.13. Brokers, etc. The Company has not dealt with any broker,
------------ ------------
finder, commission agent or other similar person in connection with the offer
and sale of the Series C Preferred Stock and the Warrants or the transactions
contemplated by this Agreement, and the Company is not under any obligation to
pay any broker's fee, finder's fee or commission in connection with such
transactions.
Section 1.14. Private Sale. Neither the Company nor any person on its
------------ ------------
behalf has, either directly or through any agent, offered any securities to or
solicited any offers to acquire any securities from, or otherwise approached,
negotiated or communicated in respect of any securities with, any person so as
thereby to require that the offer or sale of such securities (including but not
limited to the Preferred Stock, the Warrants and the Common Stock) be registered
pursuant to the provisions of Section 5 of the 1933 Act, or the securities laws
of any state.
Section 1.15. Other Agreements of Founders and Officers, etc. None of the
------------ ----------------------------------------------
Founders or Officers is a party to or bound by any agreement, contract or
commitment, or subject to any restrictions, including without limitation any
non-disclosure or non-competition agreements or legal restrictions on the use by
such person of trade secrets or proprietary information of others or any other
agreement, contract or commitment which materially and adversely affects, or
which in the future may (so far as the Company can now foresee) adversely affect
the business or operations of the Company or the right of any such person to
participate in the affairs of the Company.
Section 1.16. Information Relating to Material Contracts. Exhibit 1.16 is
------------ ------------------------------------------ ------------
a complete and accurate list of all contracts of the following types to which
the Company is a party: (a) contracts (written or unwritten) with respect to
which the Company has any liability or obligation, contingent or otherwise, or
which may otherwise have any continuing effect after the date of this
-5-
<PAGE>
Agreement, and which involve in any case more than $25,000 or which place any
material limitation on the method of conducting or scope of the Company's
business, (b) contracts with labor unions, (c) plans pursuant to which benefits
are provided to employees of the Company, (d) contracts with officers,
directors, or shareholders of the Company, or the spouses or relatives thereof,
(e) any other material contracts, instruments, commitments, plans or
arrangements, copies of which would be required to be filed with the Securities
and Exchange Commission as an exhibit to a registration statement on Form S-1 if
the Company were registering its Common Stock under the 1933 Act, (f) all
agreements known to the Company relating to any securities of the Company or
rights in connection therewith, and (g) all other contracts to which the Company
is a party or by which it is bound which are not in the ordinary course of the
Company's business or the performance of which is not expected to be completed
prior to 30 days after the date hereof. All the foregoing are herein called
"Material Contracts." Such list includes with respect to each listed Material
Contract the names of the parties thereto, the date thereof, its title or other
general description, and a brief summary of its contents and the amounts
involved in connection therewith. Upon request, the Company will furnish to any
Investor, at any time prior to or after the Closing, copies of any material
Contracts not previously furnished to such Investor and any further information
that such Investor may reasonably request in connection therewith.
Section 1.17. Employee Retirement Income Security Act of 1974. The
------------ -----------------------------------------------
Company has not incurred (a) any material accumulated funding deficiency within
the meaning of the Employee Retirement Income Security Act of 1974, or (b) any
material liability to the Pension Benefit Guaranty Corporation established under
such Act (or any successor thereto under such Act) in connection with any
employee benefit plan established or maintained by it; nor has the Company had
any tax assessed against it by the Internal Revenue Service for any alleged
violation under Section 4975 of the Internal Revenue Code.
Section 1.18. Insurance. The Company carries insurance covering its
------------ ---------
properties and business adequate and customary for the type and scope of the
properties owned by it and business conducted by it. A schedule of insurance
coverage is attached hereto as Exhibit 1.18, all of which insurance is currently
------------
in full force and effect.
Section 1.19. Absence of Liabilities. The Company did not have, as of
------------ ----------------------
August 31, 1990, any liabilities of any type, whether absolute or contingent,
which in the aggregate exceeded $15,000, which were not fully reflected on the
Balance Sheet.
Section 1.20. Books and Records. The books and records of the Company
------------ -----------------
accurately and completely reflect in all material respects all information
relating to the business of the Company, the nature, acquisition, maintenance
and location of the assets of the Company, the nature of all transactions giving
rise to the obligations or accounts receivable of the Company, and transactions
in the capital stock of the Company.
Section 1.21. Leases. The Company is a party to the leases for real
------------ ------
property appearing in Exhibit 1.21, which also sets forth a summary description
------------
of the key terms of such leases. All
-6-
<PAGE>
of such leases are valid and subsisting and the Company is not in breach of any
of its material obligations under any of such leases.
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
Each of the Investors severally represents and warrants to the Company
that:
Section 2.01. Power and Authority Relative to this Transaction. Such
------------ ------------------------------------------------
Investor has full power and authority and has taken all required corporate or
partnership and other action necessary to permit it to execute and deliver and
to carry out the terms of this Agreement and all other documents or instruments
required hereby.
Section 2.02. Purchase for Investment. Such investor is purchasing the
------------ -----------------------
Series C Preferred Stock and the Warrants purchased by it hereunder for
investment and not with a view to the distribution thereof, except for
registered resales as provided in Article VIII and the transfer contemplated by
the last sentence of Section 8.02 hereof. Furthermore, such Investor
------------
acknowledges that in taking the Series C Preferred Stock and the Warrants (a) it
must be prepared to continue to bear the economic risk of such investment for an
indefinite period of time because such securities (and the Common Stock issuable
upon conversion of the Series C Preferred Stock or exercise of the warrants)
have not been registered under the 1933 Act and cannot be sold unless they are
subsequently registered under the 1933 Act and applicable state laws, or unless
exemptions from such registrations are available; (b) routine sales of the
Series C Preferred Stock and the Warrants (and the Common Stock issuable upon
conversion of the Series C Preferred Stock and exercise of the Warrants) made in
reliance upon Rule 144 under the 1933 Act can be made only in limited amounts in
accordance with the terms and conditions of such Rule; (c) there can be no
assurance that the conditions precedent to making sales under such rule will be
,met; and (d) certificates representing the Series C Preferred Stock and the
Warrants will bear a restrictive legend referring to the transfer restrictions
described herein relating to the 1933 Act in the form set forth in Section 8.01
hereof. Such Investor also acknowledges that neither the Company nor any other
person is assuming any obligation to register such securities except the
obligations to register the Common Stock of the Company as provided in Article
VIII, and such Investor has been advised that neither the Company nor any other
person has any present intention to otherwise register the securities. Such
Investor further agrees that it will not sell, assign or transfer any of the
Series C Preferred Stock or the Warrants acquired pursuant to this Agreement or
the Common Stock issuable upon conversion of the Series C Preferred Stock or
exercise of the warrants in violation of the 1933 Act or any applicable rule or
regulation thereunder.
Section 2.03. Receipt of Information. Such investor has received all
------------ ----------------------
information that it has requested from the Company and believes such information
is sufficient to make an informed decision with respect to its purchase of the
Series C Preferred Stock and the Warrants.
Section 2.04. Financial Resources; Knowledge and Experience. Such
------------ ---------------------------------------------
Investor possesses the financial resources to bear the risk of economic loss
with respect to its purchase of the Series C Preferred Stock and the warrants.
Such Investor has such knowledge and experience in
-7-
<PAGE>
financial and business matters that it is able to evaluate the merits and make
an informed investment decision with respect to its purchase of the Series C
Preferred Stock and the Warrants.
Section 2.05. Brokers Etc. Such Investor has not dealt with any broker,
------------ -----------
finder, commission agent or other similar person in connection with the offer
and sale of the Series C Preferred Stock and the Warrants or the transactions
contemplated by this Agreement and is under no obligation to pay any broker's
fee, finder's fee or commission in connection with such transactions.
Section 2.06. Business Plan. Each Investor acknowledges that the Business
------------ -------------
Plan represents only the Company's best judgment as of the date thereof as to
the matters covered thereby, and does not constitute a warranty or guaranty that
any of the results reflected therein can or will be achieved by the Company.
ARTICLE III. THE INVESTMENT.
Section 3.01. The Series C Preferred Stock and Warrants. Subject to the
------------ -----------------------------------------
terms and conditions hereof, including without limitation Section 3.02, and in
reliance on the representations and warranties contained herein, the Company
shall issue and sell to the Investors, and the Investors shall purchase from the
Company: (i) an aggregate of 553,663 shares of Series C Preferred Stock, each
Investor to purchase the number of shares set forth opposite its name in Exhibit
-------
3.01 hereto, at a purchase price of $7.4925 per share, and (ii) warrants (the
- ----
"Warrants"), in the form of Exhibit 3.01A hereto, to purchase an aggregate of
-------------
415,245 shares of Common Stock at an exercise price of $0.20, each Investor to
purchase Warrants for the number of shares set forth opposite such Investor's
name on Exhibit 3.01, at a purchase price of $0.01 per Warrant. The aggregate
------------
purchase .price for the shares of Series C Preferred Stock and the Warrants to
be purchased by each Investor is set forth on Exhibit 3.01 hereto. The
------------
capitalized term "Stock", as used in this Agreement, refers to the Series C
Preferred Stock sold to the Investors hereunder, the Series A Preferred Stock
sold pursuant to the Purchase Agreement dated March 18, 1987 (the "Series A
Purchase Agreement") among the Company, the Officers, the Founders and the
Series A Investors, the Series B Preferred Stock sold pursuant to the Series B
Purchase Agreement, any Common Stock issued upon conversion of any of such
Preferred Stock or upon exercise of the Warrants, and any stock issued as a
dividend or distribution on or in exchange for any of such Preferred Stock or
Common Stock (whether such stock is held by an Investor, a Series A Investor, a
Series B Investor or its assignees), but not to other stock of the same class or
of any other class which is now or hereafter may be outstanding; provided,
however, that upon the sale of any Stock in such a manner that it ceases to be a
restricted security as defined in Rule 144 under the 1933 Act, the shares so
sold shall no longer be deemed to be Stock for the purposes of Article VIII of
this Agreement.
Section 3.02. Purchase and Payment for the Series C Preferred Stock and
------------ ---------------------------------------------------------
Warrants. Each of the Investors shall purchase the Series C Preferred Stock and
- --------
the Warrants purchased by it hereunder and shall pay in consideration therefor
by check, by wire transfer, or by cancellation
-8-
<PAGE>
of indebtedness the total amount set forth opposite such Investor's name on
Exhibit 3.01 at the Closing referred to in Article V. Any such payment by
- ------------
cancellation of indebtedness shall be accomplished by surrender to the Company
by certain of the Investors of Subordinated Term Notes (the "Notes") of the
Company issued in the aggregate principal amount of $1,119,999.99 as of July 13,
1990 which Notes shall be valued for purposes of such payment at face value,
with interest in the amount of $32,526.03 representing all interest payable with
respect thereto from June 29, 1990 through October 12, 1990, such interest being
credited toward the purchase price of the Series C Preferred Stock and the
Warrants.
ARTICLE IV. USE OF PROCEEDS.
The Company agrees to use the proceeds of the sale of the Series C
Preferred Stock and the Warrants for its operations as set forth in the Business
Plan.
ARTICLE V. THE CLOSING.
The purchase and sale of the Series C Preferred Stock and the warrants
referred to in Article III shall take place at a closing (the "Closing") to be
held at the offices of Testa, Hurwitz Thibeault, Exchange Place, 53 State
Street, Boston, Massachusetts. The Closing shall occur at 10:00 a.m. local time
on October 12, 1990, or at such other place and time as may be mutually agreed
upon in writing.
ARTICLE VI. CONDITIONS OF THE CLOSING.
The obligations of the Investors to purchase the Series C Preferred Stock
and the warrants shall be subject to satisfaction of the following conditions at
and as of the Closing:
Section 6.01. Issuance of Stock and Warrants. The Company shall have duly
------------ ------------------------------
issued and delivered certificates representing the Series C Preferred Stock and
the Warrants to the Investors.
Section 6.02. No Condition of Default. No Condition of Default shall have
------------ -----------------------
occurred and be continuing. As used herein, "Condition of Default" shall mean
any failure by the Company to comply with any obligation hereunder, unless such
failure shall have been cured or waived by all of the Investors.
Section 6.03. Stockholders Agreement. The Company, the Founders, the
------------ ----------------------
Officers, the Series A Investors of the Series B Investors and the Investors
shall have entered into a Second Amended and Restated Stockholders Agreement in
the form of Exhibit 6.03 (the "Stockholders Agreement").
------------
Section 6.04. Termination of Trust Agreement and Trust Option Agreement.
------------ ---------------------------------------------------------
The Company, the Series A Investors, the Series B Investors, the Investors and
Joshua Bekenstein as trustee of the trust created by the Trust Agreement dated
March 18, 1987, and amended as of
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<PAGE>
October 12, 1988, between the Company as settlor and Mr. Bekenstein as trustee,
shall have terminated such Trust Agreement and the Trust option Agreement dated
March 18, 1987, and amended as of October 12, 1988 among Mr. Bekenstein as
trustee of such trust, the Series A Investors, and the Series B Investors.
Section 6.05. No Adverse Changes. Prior to the Closing, there shall, in
------------ ------------------
the sole opinion of the Investors, be no present or anticipated adverse change
in the condition (financial or otherwise), properties, proposed business
operations, management, potential competition of, or any matter affecting, the
Company or its prospects.
Section 6.06. Legal Opinion from Counsel for the Company, etc. Each of
------------ -----------------------------------------------
the Investors shall have received the written opinion of Testa, Hurwitz &
Thibeault, counsel for the Company, in the form of Exhibit 6.06, and such other
------------
certificates and documents, in each case in form and substance satisfactory to
the Investors and their special counsel, with respect to such matters as the
Investors or their special counsel may request.
Section 6.07. Officer's Certificate re Representations and Warranties,
------------ --------------------------------------------------------
Conditions. The representations and warranties of the Company shall be true at
- ----------
and as of the Closing, and the Company shall have delivered to each of the
Investors a certificate of a principal officer of the Company dated the date of
the Closing to that effect and to the effect that each of the conditions to the
Closing have been satisfied.
ARTICLE VII. GENERAL COVENANTS OF THE COMPANY.
The Company agrees with the Investors (such term to include, for purposes
of this Article VII, the Series A Investors and the Series B Investors) to the
following covenants:
Section 7.01. Expenses of Investors. The Company will bear all reasonable
------------ ---------------------
expenses of the Investors in connection with the negotiation, preparation,
execution, performance, amendment or enforcement of this Agreement, including
the reasonable fees up to $15,000.00 of Ropes & Gray, special counsel for the
Investors, in connection with the negotiation, preparation and execution of this
Agreement.
Section 7.02. Accounts and Reports. The Company will furnish to each of
------------ --------------------
the Investors which holds at least 25,000 shares of the Preferred Stock (or the
number of shares of Common Stock into which such number of shares of Preferred
Stock shall have been converted), adjusted appropriately for stock dividends,
stock splits, combinations or the like, and to each transferee of an Investor
holding at least such number of shares:
(a) Budget; etc. Not later than 60 days before the commencement of each
-----------
fiscal year, the Company shall prepare and submit to each such Investor and to
the board of directors of the Company a draft of a business plan for such year
and capital and operating expense budgets, projections of sources and
applications of funds, balance sheets and profit and loss projections for
-10-
<PAGE>
each month of such fiscal year, all itemized in reasonable detail (including
itemization of provisions for compensation of officers and key employees). Any
material revisions made in such budgets or projections shall be furnished to
each such investor within 10 days after the adoption of such revisions.
(b) Annual Reports. As soon as available and in any event within 90 days
--------------
after the end of each fiscal year, financial statements of the Company including
a balance sheet as at the end of such fiscal year and statements of income and
retained earnings and of sources and applications of funds for such fiscal year,
in each case setting forth in comparative form the figures for the preceding
year, together with all notes thereto, prepared in reasonable detail and in
accordance with generally accepted accounting principles consistently applied
and accompanied by the opinion thereon of such firm of independent certified
public accountants of recognized national standing as may be selected by the
board of directors of the Company. The Company shall use its best efforts to
obtain an unqualified opinion of such firm of independent certified public
accountants. Such report shall be certified by the chief financial officer of
the Company to be complete and accurate in all material respects, to fairly
present the financial condition of the Company and to be prepared in accordance
with generally accepted accounting principles, consistently applied.
(c) Monthly Reports. As soon as available, and in any event within 30 days
---------------
after the end of each monthly accounting period other than the last monthly
accounting period in any fiscal year, financial statements of the Company
including a balance sheet as at the end of such accounting period and statements
of income and retained earnings and of sources and application of funds for such
accounting period and for the period from the beginning of such fiscal year to
the end of such accounting period, and setting forth in comparative form the
figures for the budget for such period as presented to the board of directors of
the Company pursuant to Subsection 7.02(a), and the figures for the
corresponding periods of the preceding fiscal year, prepared in reasonable
detail and (except in the case of budget figures) in accordance with generally
accepted accounting principles consistently applied, and certified by the chief
financial officer of the Company to be complete and accurate in all material
respects, to fairly present the financial condition of the Company and to be
prepared in accordance with generally accepted accounting principles,
consistently applied, except for normal year-end adjustments and except for the
omission of footnotes and other disclosures normally required by such
principles. Together with such reports, the Company shall furnish to each
Investor a summary discussion, signed by a principal officer of the Company,
describing the performance of, and any material developments concerning, each of
the Company's principal functional areas.
(d) Audit Reports. Promptly, and in no event more than 5 business days
-------------
after receipt thereof, copies of all audit reports, "management letters", so
called, and other communications and reports submitted to the Company by
independent certified public accountants in connection with each interim or
special audit of the books of the Company made by such accountants.
(e) Stockholder Information, SEC Filings, Etc. Promptly upon their
-----------------------------------------
becoming available (and in no event later than they are first sent to security
holders, any securities exchange,
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<PAGE>
or the Securities and Exchange Commission), copies (without duplication) of all
financial statements, reports, notices and proxy statements sent by the Company
to its security holders and all annual, periodic or special reports or
registration statements filed by the Company with the Securities and Exchange
Commission.
(f) Reports of Changes in Condition. Within 10 days after management of
-------------------------------
the Company has knowledge thereof, written reports of any actual or anticipated
adverse change in the Company's operations or financial condition.
(g) Other Statistical and Financial Reports. Promptly upon their becoming
---------------------------------------
available (and in no event later -than they are first sent to the persons
otherwise contractually entitled thereto), copies of all statistical or
financial reports required under any other investment or loan agreement to which
the Company is a party or by which it may be bound.
(h) Consulting Reports. Promptly, and in no event more than 5 business
------------------
days after receipt thereof, copies of all material reports delivered to the
Company by any consultants or other experts engaged by the Company which address
the Company's operations or industry.
(i) Officer's Certificate. With each report pursuant to Subsections (b) or
---------------------
(c) of this Section 7.02, an Officers Certificate, substantially in the form of
Exhibit 7.02.
- ------------
Section 7.03. Information and Inspection. The Company will furnish to
------------ --------------------------
each Investor which holds at least 25,000 shares of the Preferred Stock (or the
number of shares of Common Stock into which such number of shares of Preferred
Stock shall have been converted), adjusted appropriately for stock splits, stock
dividends, combinations and the like, from time to time with reasonable
promptness, upon request, full information pertinent to any covenant, provision,
or condition hereof or to any matter in connection with the business of the
Company, and, at all reasonable times and as often as any such Investor shall
reasonably request, permit any authorized representative designated by it to
visit and inspect any of the Company's properties, including its books (and to
make extracts therefrom), and to discuss its affairs, finances and accounts with
its officers. Each Investor agrees that it shall keep confidential and not
disclose to third parties (except for professional advisors or as may be
required by law) any confidential or proprietary information received by it
pursuant to this Article VII, so long as such information is not generally
available to the public.
Section 7.04. Additional Advice. The Company shall promptly advise each
------------ -----------------
Investor which holds at least 25,000 shares of the Preferred Stock (or the
number of shares of Common Stock into which such number of shares of Preferred
Stock shall have been converted), adjusted appropriately for stock splits, stock
dividends, combinations and the like, of the existence of any Condition of
Default or a material default in the performance by the Company under any
covenant or agreement contained in any other material agreement to which it is
party or by which it is bound or the commencement of any litigation in which the
amount in controversy exceeds $25,000.
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<PAGE>
Section 7.05. Full Time of Officers. Except as permitted in writing by
------------ ---------------------
the Board of directors of the Company, each of the officers, while an employee
of the Company, will devote full time to the business and affairs of the Company
consistent with the practice of senior executives in the same industry.
Section 7.06. Life Insurance. The Company shall use its best efforts to
------------ --------------
obtain and maintain with financially sound and reputable insurers one year
renewable term life insurance on the life of each Officer (provided he or she is
insurable) in the amount of $1,000,000, with proceeds payable to the Company.
These policies shall be renewed yearly and shall not be cancelable by the
Company without the agreement of all the representatives of the Preferred Stock
on the Company's board of directors.
Section 7.07. Restricted Activities. The Company will not, without the
------------ ---------------------
approval of at least a majority of the directors: (a) issue any capital stock of
the Company or any securities convertible into capital stock of the Company or
grant any option for the purchase of any such capital stock or securities; (b)
hire any corporate officer, any individual with executive responsibilities or
any person whose compensation shall be $40,000 or more per annum; (c) change the
compensation of any officer or employee earning $40,000 or more per annum; (d)
adopt any annual operating or capital budget; (e) enter into any contract
involving in any case more than $20,000 or the performance of which is not
expected to be completed prior to six months from the date thereof or make any
capital expenditure exceeding $20,000; (f) consolidate with or merge into any
other entity, or permit any other entity to consolidate with or merge into it;
(g) sell, lease or otherwise dispose of its property as an entirety or
substantially as an entirety to any person or entity" (h) enter into any
transaction or series of related transactions, including, without limitation,
any loans or extensions of credit or royalty agreements with any officer or
director of the Company or holder of any class of capital stock of the Company
or any member of their respective immediate families or any corporation or other
entity directly or indirectly controlled by one or more officers, directors or
stockholders, and (i) assume the liabilities or guarantee the indebtedness of
any person. The Company will: (i) unless otherwise approved by at least a
majority of the directors, continue to engage principally in the business in
which it is now engaged; (ii) do all things necessary to preserve and keep in
full force and effect its corporate existence and its rights and franchises
necessary to conduct its business; (iii) comply with all laws and regulations of
the United States or any state or political subdivision thereof, or of any
governmental authority which may have jurisdiction over it or its business; (iv)
pay all real and personal property taxes, assessments and charges as well as all
franchise, income, unemployment, old age benefit, withholding, sales and other
taxes assessed against it, or payable by it at such times and in such manner as
to prevent any penalty from accruing or any lien or charge from attaching to its
property, (vi) indemnify and hold its officers and directors harmless against
any threatened or pending action, suit or proceeding, and against any expenses,
judgments, fines and amounts paid or incurred by them in connection therewith to
the extent now authorized by the Company's Certificate of Incorporation and By-
Laws.
-13-
<PAGE>
Section 7.08. Payment of Directors' Expenses. The Company shall reimburse
------------ ------------------------------
any director for his or her reasonable expenses incurred in attending meetings
of the board of directors held outside the Boston, Massachusetts metropolitan
area.
ARTICLE VIII. TRANSFER RESTRICTIONS AND REGISTRATIONS.
Section 8.01. Legend. Unless and until otherwise permitted as hereinafter
------------ ------
provided, each certificate for Stock and each certificate issued to any
subsequent transferee of any such certificate shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of
1933 (the "Act") or the securities laws of any state. Such shares may
not be offered for sale, sold, transferred, pledged or hypothecated,
in the absence of effective registration statements covering such
shares under the Act and any applicable state securities laws, unless
the holder shall have obtained an opinion of counsel, satisfactory to
the corporation, that such registration is not required."
When (a) any Stock shall have been effectively registered and disposed of in
accordance with registrations under the 1933 Act and any applicable state
securities laws, or (b) both counsel referred to in Section 8.02 shall have
determined that such legends are no longer required in order to insure
compliance with applicable federal or state laws, the holders of Stock bearing
such restrictive legend shall be entitled to receive from the Company, without
expense, a new certificate for such Stock, not bearing such restrictive legend.
Section 8.02. Transfer of Stock Where Registration Not Required. Before
------------ -------------------------------------------------
transferring any Stock other than pursuant to Rule 144 of the Act, each
holder of Stock shall give written notice to the Company of its intention to do
so, describing briefly the manner of the disposition to be made thereof.
Promptly upon receiving such written notice, the Company shall present copies
thereof to its counsel. If the Company so requires, such holder shall furnish
the Company with an opinion of Ropes & Gray, or other counsel acceptable to the
Company, with respect to the proposed disposition. If in the opinion of counsel
for the Company, which opinion shall be rendered as promptly as practicable and
in any event not later than 15 days after the later of (a) receipt by the
Company of such written notice or (b) such opinion of holder's counsel, the
proposed disposition of Stock may be effected without registration or
qualification thereof under any federal or state law, the Company, as promptly
as practicable, shall notify such holder of such opinion, whereupon such holder
shall be entitled to dispose of the Stock in accordance with the terms of the
notice delivered by it to the Company. Anything herein to the contrary
notwithstanding, provided that the transferee agrees to be bound by the terms of
this Agreement, any Investor (such term to include, for purposes of this Article
VII, each Series A Investor and each Series B Investor) may transfer any stock
without such notice to a partner, retired partner,
-14-
<PAGE>
a stockholder, a subsidiary or a successor of such Investor (or the estate of
such partner, retired partner or stockholder), provided, in each case, that such
Investor first obtains from Ropes & Gray or other counsel satisfactory to the
Company a written opinion that the proposed transfer of the stock may be
effected without the registration or qualification thereof under any federal or
state law or that any required registration or qualification has been effected.
Section 8.03. Required Registration. If requested by the holders of at
------------ ---------------------
least 30% of the Stock to-register such Stock under the 1933 Act, the Company
shall promptly give written notice of such request to all registered holders of
Stock. Any holder of Stock desiring to have any of its Stock included in such
registration shall, within 30 days after its receipt of such notice from the
Company, notify the Company of the number of shares of Stock which it desires to
have so included. The Company shall, as expeditiously as possible, endeavor in
good faith to effect such registration and any required qualification, to give
any notification, to obtain any governmental approval and to effect listing with
any securities exchange on which the stock of the Company is then listed, which
may be required to permit each holder of Stock who has given the Company a
timely request or notice pursuant to this Section 8.03 (but, without the consent
of all such holders, no other holder of securities of the Company) to dispose of
the Stock referred to in such request or notice in the manner specified therein.
The Company's obligations pursuant to this Section 8.03 and shall be limited to
two such registrations. The Company shall have no obligation to effect any
registration pursuant to this Section 8.03 unless the projected aggregate price
to the public of the Stock included in such registration is not less than
$5,000,000.
Section 8.04. Piggy-Back Registration Rights. If the Company at any time
------------ ------------------------------
proposes to register, under The 1933 Act, or qualify any of its Common Stock or
securities convertible into Common Stock, other than registrations solely for
the purpose of any plan for the acquisition of such shares by employees of the
Company or registrations relating to a merger, acquisition or other transactions
of the type described in Rule 145 or any comparable rule, on Form S-4 or any
similar form (collectively "Excluded Registrations"), it will each such time
give written notice to the Officers and Founders and to all registered holders
of Stock of its intention to do so. Any holder of Stock desiring to have any of
its Stock and any officer or Founder desiring to have any of its Common Stock
included in such registration or qualification shall, within 30 days after its
receipt of such notice from the Company, notify the Company of the number of
shares of Stock or Common Stock, as the case may be, which it desires to have so
included and the manner in which it proposes to dispose of such securities. The
Company will, at its sole expense, use its best efforts to cause all such Stock
or Common Stock, as the case may be, the holders of which shall have requested
the registration or qualification thereof, to be registered or qualified to the
extent requisite (in the opinion of either of the counsel referred to in Section
8.02) to permit the sale or other disposition thereof in the manner described by
such holder; provided, however, that if in connection with any offering by the
Company of Common Stock or securities convertible into Common Stock pursuant to
a registration under the 1933 Act (which is not an Excluded Registration), the
managing underwriter shall limit or eliminate the number of previously-issued
shares of the Company's securities which may be included in any such
registration statement because, in its judgment, such action is necessary to
effect an orderly public distribution, and such
-15-
<PAGE>
limitation is imposed first with respect only to the Common Stock of the
officers and Founders and, in the event that the elimination of the Common Stock
of the officers and Founders from such registration statement is insufficient,
in the judgment of the managing underwriter, to effect an orderly public
distribution, thereafter on all other holders of securities which have an
incidental or "piggyback" right to be included in the registration statement pro
rata in accordance with their respective holdings of such securities, and no
outstanding securities are included other than pursuant to such a right, then
the Company shall be obligated to include in such registration statement only
such limited portion of the Stock which it has been requested hereunder to
include.
In the event that the Company in any registration under this Section 8.04
offers the Investors, officers and Founders the opportunity to sell such of the
shares of Stock or Common Stock, in the case of the officers and Founders, which
such Investors, Officers and Founders propose to register to underwriters on a
"firm commitment" basis (as opposed to a "best efforts" basis), the Investors,
Officers and Founders shall, as a condition to their participating in such
registration, accept such offer to sell such securities to such underwriters if
the manager of the underwriters so requires and shall enter into an agreement
with such underwriter containing conventional representations, warranties and
indemnity provisions, or, in the alternative, agree not to sell such of the
shares of Stock or Common Stock, in the case of the Officer and Founders,
pursuant to such registration within such reasonable period (not exceeding 120
days) as may be specified by the manager of the underwriters to enable the
underwriters to complete their distributions and establish a satisfactory
trading market for the Company's Common Stock. The Investors, Officers and
Founders shall comply with such other reasonable requirements as may be imposed
by the manager of the underwriters to effect an orderly distribution of shares.
Should any Investor, Officer or Founder decide not to have any shares of
such Stock or Common Stock, as the case may be, of the Company then held by it
included in such registration under this Section 8.04 or if some or all of such
shares are excluded from registration as provided herein, such Investor, officer
or Founder agrees, upon the request of the manager of the underwriters, not to
sell any of such Stock or Common Stock, in the case of the Officers, within 90
days after said registration.
The Company's obligations pursuant to this Section 8.04 to include shares of
Stock in registrations under the 1933 Act shall terminate after five such
registrations in each of which the Investors have been permitted to include at
least 50% of the shares of Stock which the Investors have requested be included;
provided, however, and notwithstanding the foregoing, the company's obligations
- -------- -------
pursuant to this Section 8.04 towards any Investor, Series A Investor, Series B
Investor or Officer holding less than 250,000 shares of capital stock of the
Company or any Founder holding less than 125,000 such shares shall terminate
after the expiration of five years following the first offering by the Company
of Common Stock pursuant to a registration under the 1933 Act (which is not an
Excluded Registration).
Section 8.05. Registration on Form S-3. Following the first offering of
------------ ------------------------
Common Stock by the Company pursuant to a registration under the 1933 Act, the
Company shall use its best
-16-
<PAGE>
efforts to qualify for registration of resales of its Common Stock under the
1933 Act on Form S-3 (or any similar form promulgated by the Securities and
Exchange Commission). To that end, the Company shall register (whether or not
required by law to do so) its Common Stock under the Securities Exchange Act of
1934 (the "1934 Act") within six months following the effective date of the
first registration of any securities of the Company under the 1933 Act. After
the Company has qualified for the registration of its Common Stock under the
1933 Act on Form S-3 (or similar form), the Company will, upon written request
of any holder or holders of shares of Stock having an aggregate market value of
not less than $500,000 to register or qualify such Stock pursuant to this
Section 8.05, promptly give written notice of such request to all registered
holders of Stock. Any holder of Stock desiring to have any of his Stock included
in such registration or qualification shall, within 30 days after its receipt of
such notice from the Company, notify the Company of the number of shares of
Stock which it desires to have so included and the manner in which it proposes
to dispose of such .Stock. The Company shall, as expeditiously as possible,
endeavor in good faith to effect a registration under the 1933 Act on Form S-3
(or similar form) of all Stock referred to in a request or notice timely given
to the Company pursuant to this Section 8.05, and to effect any registration or
qualification of such Stock under any state law, and any listing of such Stock
with any securities exchange on which the Common Stock of the Company is then
listed, which may be required to permit the sale or disposition of such Stock in
the manner specified in such request or notices. the Company shall not be
required to cause a registration statement to become effective pursuant to this
Section 8.05 prior to 180 days following the effective date of the most recent
registration by the Company under the 1933 Act.
Section 8.06. Payment of Expenses. The Company shall bear the expense
------------ -------------------
(excluding underwriting commissions, dealers, fees, brokers' fees and
concessions applicable to Stock) of all transfers of Stock pursuant to Section
8.02, two registrations pursuant to Section 8.03, five registrations pursuant to
Section 8.04 and all registrations pursuant to Sections 8.05, including all
reasonable expenses of the Investors and fees and disbursements of a single
counsel for the Investors. The Company shall also bear such expense (excluding
such commissions, fees and concessions) of five registrations of the Common
Stock of the officers and Founders pursuant to Section 8.04. The Company shall
not be required to undertake any registration in addition to those for which it
is to bear the expenses unless and until the Company shall have received
assurances satisfactory to it that the holders of the securities to be
registered will bear all expenses thereof (including fees and disbursements of
counsel).
Section 8.07. Registrations to be Maintained; only Common Stock to be
------------ -------------------------------------------------------
Registered. The Company shall keep effective and maintain any registration,
- ----------
qualification, notification or approval specified in Sections 8.03 or 8.04 for
such period not exceeding 120 days, and in Section 8.05 for such period not
exceeding 180 days, as may be necessary for the holders of Stock to dispose
thereof, and from time to time shall amend or supplement the prospectus used in
connection therewith to the extent necessary in order to comply with applicable
law. The Company shall not be required pursuant to any provision of this
Article VIII to register or qualify any securities other than the Common Stock
of the Company, and the Company may require as a condition of any such
registration or qualification that any Stock to be included in such registration
or qualification
-17-
<PAGE>
other than Common Stock be converted to Common Stock no later than the effective
date of any registration or qualification effected pursuant to this Article
VIII.
Section 8.08. Indemnification. The Company hereby agrees to indemnify
------------ ---------------
each holder of Stock and each person, if any, who controls any such holder
within the meaning of applicable federal and state securities laws (the
"Applicable Securities Laws") against all losses, claims, damages, liabilities
and expenses (under the Applicable Securities Laws, or common law or otherwise)
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus (and as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) or any preliminary prospectus or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein complete or not misleading except
insofar as such losses, claims, damages, liabilities or expenses are caused by
any untrue statement or omission contained in information furnished in writing
to the Company by such holder or by any underwriter through which any offering
is made pursuant to any registration statement provided for under this Article
VIII, expressly for use therein. If the offering pursuant to any registration
statement provided for under this Article VIII is made through underwriters, the
Company agrees to enter into an underwriting agreement in customary form with
such underwriters and to indemnify such underwriters and each person who
controls such underwriters within the meaning of the Applicable Securities Laws
to the same extent as hereinabove provided with respect to the indemnification
of the holders of Stock, provided that such underwriters shall to the same
extent indemnify the Company and each holder of Stock included in such offering
in connection with information furnished by such underwriters expressly for use
in the related registration statement. In connection with any registration
statement in which a holder of Stock is participating, each such holder will
furnish to the Company in writing such information as shall reasonably be
requested by the Company for use in any such registration statement or
prospectus and will indemnify the Company, its directors and officers, each
person, if any, who controls the Company within the meaning of the Applicable
Securities Laws, such underwriters and each person who controls such
underwriters within the meaning of the Applicable Securities Laws, against any
losses, claims, damages, liabilities and expenses resulting from any untrue
statement or alleged untrue statement of a material fact or any omission or
alleged omission of a material fact required to be stated in the registration
statement or prospectus and necessary to make the statements therein complete or
not misleading, but only to the extent that such untrue statement or omission is
contained in information so furnished in writing by such holder expressly for
use therein.
Section 8.09. Rule 144 Requirements. Within six months following the
------------ ---------------------
first offering of Common Stock by the Company pursuant to a registration under
the 1933 Act, the Company shall become and shall thereafter remain subject to
the reporting requirements of either Section 13 or Section 15(d) of the
Securities Exchange Act of 1934. At all times when the Company is subject to
such reporting requirements, the Company shall file with the Securities and
Exchange Commission such information as the Commission may require under either
of said Sections, and shall take all action as may be required as a condition to
the availability of Rule 144 under the 1933 Act (or any successor exemptive rule
hereinafter in effect) for sales of the Stock. The
-18-
<PAGE>
Company shall furnish to any holder of the Stock, upon request, a written
statement executed by the Company as to the steps it has taken to comply with
the current public information requirement of Rule 144.
Section 8.10. Action Under State Laws. The Company shall use its best
------------ -----------------------
efforts to register or qualify the securities covered by a-registration
statement which includes Stock under. the securities or blue sky laws of such
jurisdictions as each selling holder of Stock shall reasonably request, and do
any and all other acts and things as may be necessary or advisable to enable
such holder to consummate the disposition of the securities in such
jurisdiction, but in no event shall the provisions of this Article VIII be
deemed to require the Company to register or qualify as a foreign corporation or
as a broker or dealer or to subject itself generally to service of process in
any jurisdiction.
ARTICLE IX. NEW ISSUANCE OF STOCK OR RIGHTS.
Section 9.01. First Refusal Rights. If at any time prior to the first
------------ --------------------
registration of the Common Stock under the 1933 Act, the Company proposes to
issue (except in a transaction described in Section 9.03), any Common Stock or
any security convertible into or having rights to purchase Common Stock, the
Company shall first offer in writing to sell to each of the Investors (such term
to include, for purposes of this Article IX, the Series A Investors and the
Series B Investors) a fraction thereof of which the numerator shall be the
number of shares of Stock then held by such Investor and the denominator shall
be the total number of shares of Common Stock then outstanding, assuming in each
case full conversion of all outstanding Preferred Stock. Such offer shall
describe such securities and specify the quantity, the price and the payment
terms. If within 30 days after receipt of such offer the Investor receiving
such written offer accepts the same in writing as to the portion referred to
above or any lesser amount, then the Company shall sell such portion of such
securities, or such lesser amount as such Investor may specify, to such Investor
upon the terms specified. Unless waived by the holders of not less than 75% of
the total number of shares of Stock then outstanding, each Investor shall have a
right of overallotment such that any shares of Common Stock or securities
convertible into Common Stock not purchased by any holder of preemptive rights
shall be reoffered to others having such rights and desiring to purchase
additional shares of Common Stock or securities convertible into Common Stock.
Section 9.02. Sale to Third Party. The Company shall be free to sell
------------ -------------------
at any time prior to 90 days after the date an offer pursuant to Section 9.01
was made or 60 days after the date such offer was rejected, whichever is
earlier, the quantity of such securities not agreed by the Investors to be
purchased by them (or all such securities in the event such offer is rejected or
is not accepted within 30 days after it has been made by the Company), but
neither more nor fewer, at a price no less favorable to the Company than that
specified in such offer and on payment terms no less favorable to the Company
than those specified in such offer. However, if such sale is not consummated
within the time specified in the preceding sentence, the Company shall not sell
such securities without again complying with Section 9.01.
-19-
<PAGE>
Section 9.03. Excluded Transactions. The following transactions shall
------------ ---------------------
be excluded from the restrictions of this Article IX:
(a) any issuance to an employee, director, or consultant of Common Stock or
rights to purchase Common Stock up to an aggregate of 1,060,150 shares
of Common Stock for hi-s own investment and as part of a bona fide
compensation plan or arrangement, or in connection with the inducement
of employees to become or remain employed by the Company pursuant to
the approval of the board of directors of the Company or a compensation
committee appointed by such board;
(b) any issuance of securities to all holders of the Company's Preferred
Stock and Common Stock, pro rata;
(c) any issuance of securities upon the exercise of any right which was not
itself issued in violation of the terms of this Article IX; and
(d) any issuance of Common Stock on conversion of the Preferred Stock.
Section 9.04. Waiver of First Refusal Right. The Series A Investors and
------------ -----------------------------
Series B Investors hereby waive all first refusal rights and rights of
overallotment under Article IX of the Series B Agreement with respect to (i) the
offer and sale of the Series C Preferred Stock and the Warrants hereunder, (ii)
the offer and sale of the Notes and Bridge warrants and (iii) the issuance of
Common Stock upon the exercise of the Warrants and the Bridge Warrants.
ARTICLE X. TERMINATION OF TRUST AGREEMENT AND TRUST OPTION AGREEMENT
Section 10.01. Termination of Trust Agreement and Trust Option Agreement.
------------- ---------------------------------------------------------
The Company, the Series A Investors, the Series B Investors and Joshua
Bekenstein as. trustee of the trust created by the Trust Agreement dated March
18, 1987, and amended as of October 12, 1988, between the Company as settlor and
Mr. Bekenstein as trustee, agree that such Trust Agreement and the Trust Option
Agreement dated March 18, 1987, and amended as of October 12, 1988 among Mr.
Bekenstein as trustee of such trust, the Series A Investors and the Series B
Investors, are hereby terminated and shall hereafter be of no further force and
effect.
ARTICLE XI. MISCELLANEOUS.
Section 11.01. Notices. All notices to a party hereunder shall be deemed
------------- -------
to have been adequately given if delivered in person or mailed, certified mail,
return receipt requested, to such party at its address set forth below (or such
other address as it may from time to time designate in writing to the other
parties hereto).
The Company: Bright Horizons Children's Centers, Inc.
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<PAGE>
One Kendall Square
Building 600
Cambridge, MA 02139
The officers or
the Founders: To each of their respective addresses set forth below
their signatures
With a Copy to: Andrew E. Taylor, Jr., Esquire
Testa, Hurwitz & Thibeault
Exchange Place
53 State Street
Boston, Massachusetts 02109
The Investors: To each of their respective addresses set forth in
Exhibit 3.01 hereto
-------
with a Copy to: Keith F. Higgins, Esquire
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Section 11.02. No Waiver; Amendments. No failure to exercise and no delay
------------- ---------------------
in exercising, on the part of any Investor, any right, power or privilege
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided are cumulative and not exclusive of any
rights or remedies provided by law. Any term, covenant, agreement or condition
of this Agreement may be amended (a) prior to the Closing, only by a writing
signed by the Company and each of the Investors, Founders and Officers and (b)
after the Closing, only by a writing signed by (i) the Company and (ii) the
holders of not less than 75% of the aggregate outstanding shares of Stock. No
amendment shall be made to this Section 11.02 without the written consent of the
holders of all of the Stock at the time outstanding and no amendment to clause
(ii) of the preceding sentence shall be made without the written consent of the
holders of all of the Stock at the time outstanding and the written consent of
each Founder and Officer. Notwithstanding the foregoing, any amendment affecting
the rights of any series of Preferred Stock in a manner different from those of
any other series of Preferred Stock shall only be effective with the written
consent of the holders of 75% of the aggregate outstanding shares of such series
of Preferred Stock whose rights are so adversely affected. No waiver of any term
or provision hereof shall be effective unless made in the same manner as an
amendment of such term or provision. For purposes of this Section 11.02, each
share of Common Stock shall count as one share and each share of Preferred Stock
shall count as the number of shares of Common Stock into which it is then
convertible.
Section 11.03. Survival of Agreements, etc. All agreements,
------------- ---------------------------
representations and warranties contained herein or made in writing by or on
behalf of the Company or any Founder or Officer
-21-
<PAGE>
in connection with the transactions contemplated hereby shall survive the
execution and delivery of this Agreement, the Closing pursuant to Article V, and
any investigation at any time made by or on behalf of any Investor. All
statements contained in any certificate or other instrument delivered after the
Closing by or on behalf of the Company pursuant hereto or in connection with the
transactions contemplated hereby shall be deemed representations and warranties
by the Company. All agreements of the Company shall terminate as to any
Investor, Series A Investor or Series B Investor when such Investor, Series A
Investor, or Series B Investor shall no longer own any shares of Stock of the
Company.
Section 11.04. Construction. This Agreement shall be 1) governed by and
------------- ------------
construed in accordance with the laws of the Commonwealth of Massachusetts. The
descriptive headings of the several Sections hereof are for convenience only and
shall not control or affect the meaning or construction of any of the provisions
hereof.
Section 11.05. Binding Effect and Benefits. This Agreement shall be
------------- ---------------------------
binding upon and shall inure to the benefit of the parties and their respective
heirs, successors and assigns, including assignees of the Stock, but, after the
closing of an initial public offering of the Common Stock registered under the
1933 Act, not any holder thereof in whose hands the Stock is not a restricted
security as defined in Rule 144 under the 1933 Act. Subject to the last clause
of the immediately preceding sentence, it is expressly contemplated that,
without limiting the general right of any investor to assign its rights herein,
all of the rights and obligations of a holder of Stock set forth in Article VIII
hereof shall devolve upon any subsequent holder of Stock originally issued to an
Investor without specified assignment and assumption thereof.
Section 11.06. Counterparts. This Agreement may be executed in any
------------- ------------
number of counterparts, and by the different parties on separate counterparts,
each of which, when so executed and delivered, shall be deemed to be an
original, but all the counterparts shall together constitute one and the same
instrument.
Section 11.07. Severability of Provisions. Any provision of this Agreement
------------- --------------------------
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 11.08. Prior Agreement. The Company, the Founders, the Officers,
------------- ---------------
the Series A Investors and the Series B Investors agree that Articles VII, VIII
and IX of the Series B Purchase Agreement shall terminate at the Closing, and
further agree that, to the extent provided herein, they shall in lieu thereof be
entitled to the benefits of, and be bound by, the provisions of Articles VII,
VIII and IX hereof.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
COMPANY:
BRIGHT HORIZONS CHILDREN'S
CENTERS, INC.
By
----------------------------------
(Title)
FOUNDERS:
------------------------------------
John M. Reynolds
------------------------------------
Anne Whitman
------------------------------------
Douglas Wooden
OFFICERS:
------------------------------------
Roger H. Brown
<PAGE>
INVESTORS:
BAIN CAPITAL FUND LIMITED
PARTNERSHIP
By Bain Capital Partners, General Partner
By__________________________________
Joshua Bekenstein,
General Partner
BAIN CAPITAL FUND LIMITED
PARTNERSHIP - II
By Bain Capital Partners, General Partner
By__________________________________
Joshua Bekenstein,
General Partner
WILLIAM BLAIR VENTURE
PARTNERS III
By William Blair Venture Management
By__________________________________
Gregg S. Newmark,
General Partner
NORWEST EQUITY PARTNERS IV,
A Minnesota Limited Partnership
By Itasca Partners, General Partner
By_______________________________________
Ernest Parizeau, General Partner
<PAGE>
REYNOLDS REVOCABLE TRUST OF
JULY 1, 1983
By
------------------------------------------
John M. Reynolds, Co-Trustee
FAMILY VENTURES III
By
------------------------------------------
Jacob F. Brown, II, General Partner
FAMILY VENTURES IV
By
------------------------------------------
Jacob F. Brown, II, General Partner
--------------------------------------------
Joshua Bekenstein
--------------------------------------------
Adam Kirsch
--------------------------------------------
Geoffrey S. Rehnert
--------------------------------------------
W. Mitt Romney
--------------------------------------------
<PAGE>
Robert F. White
SERIES A INVESTORS (for purposes of
Articles VII, VIII, IX and X only)
BRIMSTONE ISLAND COMPANY L.P.
By
------------------------------------------
(Title)
<PAGE>
CARDWELL CHILDREN'S TRUST
DATED JUNE 1, 1987
By
------------------------------------------
(Title)
--------------------------------------------
Paul Bancroft III
--------------------------------------------
Robert H. Buescher
--------------------------------------------
William T. Burgin
--------------------------------------------
Christopher F. O. Gabrieli
<PAGE>
--------------------------------------------
R. Daniel Saxe, Jr.
SERIES B INVESTORS (for purposes of Articles VII,
VIII, IX and X only)
BESSEMER VENTURE PARTNERS II
L.P.
By Deer II & Co., General Partner
By
-----------------------------
General Partner
BRIGHT HORIZONS ASSOCIATES
By
-------------------------------------
John M. Reynolds, General Partner
<PAGE>
--------------------------------------------
Robert Avinger
--------------------------------------------
Neill H. Brownstein
--------------------------------------------
Robert H. Buescher
--------------------------------------------
James H. Furneaux
--------------------------------------------
John I. Wechsler
TRUSTEE: (for purposes of Article X only)
--------------------------------------------
Joshua Bekenstein, Trustee, Trust Agreement
dated as of March 18, 1987 and amended as of
October 12, 1988 between the Company and the
Trustee
<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
1987 STOCK PLAN
---------------
1. Purpose. This 1987 Stock Plan (the "Plan") is intended to provide
-------
incentives (a) to the officers and other employees of Bright Horizons Children's
Centers, Inc. (the "Company"), its parent (if any) and any present or future
subsidiaries of the Company (collectively, "Related Corporations") by providing
them with opportunities to purchase stock in the Company pursuant to options
granted hereunder which qualify as "incentive stock options" under Section
422A(b) of the Internal Revenue Code of 1986 (the "Code") ("ISO" or "ISOs"); (b)
to directors, officers, employees and consultants of the Company and Related
Corporations by providing them with opportunities to purchase stock in the
Company pursuant to options granted hereunder which do not qualify as ISOs
("Non-Qualified Option" or "Non-Qualified Options"); (c) to directors, officers,
employees and consultants of the Company and Related Corporations by providing
them with awards of stock in the Company ("Awards"); and (d) to directors,
officers, employees and consultants of the Company and Related Corporations by
providing them with opportunities to make direct purchases of stock in the
Company ("Purchases"). Both ISOs and Non-Qualified options are referred to
hereafter individually an "Option" and collectively as "Options". Options,
Awards and authorizations to make Purchases are referred to hereafter
collectively as "Stock Rights". As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation",
respectively, as those terms are defined in Section 425 of the Code.
2. Administration of the Plan.
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(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board"). The Board may appoint a Stock Plan Committee (the
"Committee") of three or more of its members to administer this Plan. No member
of the Committee, while a member, shall be eligible to participate in the Plan.
Subject to ratification of the grant or authorization of each Stock Right by the
Board (if so required by applicable state law), and subject to the terms of the
Plan, the Committee, if so appointed, shall have the authority to (i) determine
the employees of the Company and Related Corporations (from among the class of
employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be
granted, and to determine (from among the class of individuals and entities
eligible under paragraph 3 to receive Non-Qualified options and Awards and to
make Purchases) to whom Non-Qualified Options, Awards and authorizations to make
Purchases may be granted; (ii) determine the time or times at which options or
Awards may be granted or Purchases made; (iii) determine the option price of
shares subject to each option, which price shall not be less than the minimum
price
<PAGE>
specified in paragraph 6, and the purchase price of shares subject to each
Purchase; (iv) determine whether each option granted shall be an ISO or a Non-
Qualified Option; (v) determine (subject to paragraph 7) the time or times when
each Option shall become exercisable and the duration of the exercise period;
(vi) determine whether restrictions such as repurchase options [Be to be imposed
on shares subject to options, Awards and Purchases and the nature of such
restrictions, if any, and (vii) interpret the Plan and prescribe and rescind
rules and regulations relating to it. If the Committee determines to issue a
Non-Qualified option, it shall take whatever actions it deems necessary, under
Section 422A of the Code and the regulations promulgated thereunder, to ensure
that such option is not treated as an ISO. The interpretation and construction
by the Committee of any provisions of the Plan or of any Stock Right granted
under it shall be final unless otherwise determined by the Board. The Committee
may from time to time adopt such rules and regulations for carrying out the Plan
as it may deem best. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Stock Right granted under it.
(b) The Committee may select one of its members as its chairman, and
shall hold meetings at such time and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee. All references in this Plan to the Committee shall mean the Board if
no Committee has been appointed. From time to time the Board may increase the
size of the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and thereafter
directly administer the Plan.
(c) Notwithstanding the provisions of paragraph 2(a), Stock Rights may
be granted to members of the Board, but no Stock Right shall be granted to any
person who is, at the time of the proposed grant, a member of the Board, unless
such grant has been approved by a majority vote of the other members of the
Board. All grants of Stock Rights to members of the Board shall in all other
respects be made in accordance with the provisions of this Plan applicable to
other eligible persons. members of the Board who are either (i) eligible for
Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may
vote on any matters affecting the administration of the Plan or the grant of any
Stock Rights pursuant to the Plan, except that no such member shall act upon the
granting to himself of Stock Rights, but any such member may be counted in
determining the existence of a quorum at any meeting of the Board during which
action is taken with respect to the granting to him of Stock Rights.
(d) Notwithstanding any other provision of this paragraph 2, in the
event the Company registers any class of any equity security pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act'), any
grants to directors of Options made at any time from the effective date of such
registration until six months after the termination of such registration shall
be made only by the Board; provided, however, that if a majority of the Board is
eligible to participate in the Plan or in any other stock option or other stock
plan of the Company or any of its affiliates, or has been so eligible at any
time within the preceding year, any
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<PAGE>
grant to directors of Options must be made by, or only in accordance with the
recommendation of, a Committee consisting of three or more persons, who may but
need not be directors or employees of the Company, appointed by the Board but
having full authority to act in the matter, none of whom is eligible to
participate in this Plan or any other stock option or other stock plan of the
Company or any of its affiliates, or has been eligible at any time within the
preceding year. The requirements imposed by the preceding sentence shall also
apply with respect to grants to officers who are not also directors. Once
appointed, the Committee shall continue to serve until otherwise directed by the
Board.
3. Eligible Employees and Others. ISOs may be granted to any employee
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of the company or any Related Corporation. Those officers and directors of the
Company who are not employees may not be granted ISOs under the Plan. Non-
Qualified Options, Awards and authorizations to make Purchases may be granted to
any director (whether or not an employee), officer, employee or consultant of
the Company or any Related Corporation. The Committee may take into
consideration a recipient's individual circumstances in determining whether to
grant an ISO, a NonQualified Option or an authorization to make a Purchase.
Granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify him from, participation in any
other grant of Stock Rights.
4. Stock. The stock subject to Options, Awards and Purchases shall be
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authorized but unissued shares of Common Stock of the Company, par value $.01
per share (the "Common Stock"), or shares of Common Stock reacquired by the
Company in any manner. The aggregate number of shares which may be issued
pursuant to the Plan is 1,250,000 subject to adjustment as provided in paragraph
13. Any such shares may be issued as ISOs, Non-Qualified Options or Awards, or
to persons or entities making Purchases, so long as the number of shares so
issued does not exceed such number, as adjusted. If any Option granted under
the Plan shall expire or terminate for any reason without having been exercised
in full or shall cease for any reason to be exercisable in whole or in part, or
if the Company shall reacquire any unvested shares issued pursuant to Awards or
Purchases, the unpurchased shares subject to such options and any unvested
shares so reacquired by the Company shall again be available for grants of Stock
Rights under the Plan.
5. Granting of Stock Rights. Stock Rights may be granted under the Plan
------------------------
at any time May 17, 1997. The date of will be the date specified the Stock
Right; provided, prior to the date on which Rights. Stock Rights may be granted
after may 18, 1987 and prior to grant of a Stock Right under the Plan by the
Committee at the time it grants however i , that such date shall not be the
Committee acts to approve the grant. The Committee shall have the right, with
the consent of the optionee, to convert an ISO granted under the Plan to a Non-
Qualified option pursuant to paragraph 16.
6. Minimum Option Price; ISO Limitations.
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<PAGE>
A. The price per share specified in the agreement relating to each
Non-Qualified Option granted under the Plan shall in no event be less than
the lesser of (i) the book value per share of Common Stock as of the end of
the fiscal year of the Company immediately preceding the date of such
grant, or (ii) 50 percent of the fair market value per share of Common
Stock on the date of such grant.
B. The price per share specified in the agreement relating to each
ISO granted under the Plan shall not be-less than the fair market value per
share of Common Stock on the date of such grant. In the case of an ISO to
be granted loan employee owning stock possessing more than ten percent of
the total combined voting power of all classes of stock of the Company or
any Related Corporation, the price per share specified in the agreement
relating to such ISO shall not be less than 110 percent of the fair market
value per share of Common Stock on the date of grant.
C. In no event shall the aggregate fair market value (determined
at the time an ISO is granted) of Common Stock for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any Related
Corporation) exceed $100,000.
D. If, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes
discussed in this sentence are available prior to the date such option is
granted and shall mean (i) the average (on that date) of the high and low
prices of the Common Stock on the principal national securities exchange on
which the Common stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the NASDAQ National Market List, if the Common
Stock is not then traded on a national securities exchange; or (iii) the
closing bid price (or average of bid prices) last quoted (on that date) by
an established quotation service for over-the-counter securities, if the
Common Stock is not reported on the NASDAQ National Market List. However,
if the Common Stock is not publicly traded at the time an Option is granted
under the Plan, "fair market value" shall be deemed to be the fair value of
the Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
7. Option Duration. Subject to earlier termination as provided in
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paragraphs 9 and 10, each option shall expire on the date specified by the
Committee, but not more than (i) ten years and one day from the date of grant in
the case of Non-Qualified options, (ii) ten years from the date of grant in the
case of ISOs generally, and (iii) five years from the date of grant in the case
of ISOs granted to an employee owning stock possessing more than ten percent of
the total combined voting power of all classes of stock of the Company or any
Related Corporation. Subject to earlier termination as provided in paragraphs 9
and 10, the term of each ISO shall be
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<PAGE>
the term set forth in the original instrument granting such ISO, except with
respect to any part of such ISO that is converted into a Non-Qualified option
pursuant to paragraph 16.
8. Exercise of 0ption. Subject to the provisions of paragraphs 9
------------------
through 12, each Option granted under the Plan shall be exercisable as follows:
A. The option shall either be fully exercisable on the date of grant
or shall become exercisable thereafter in such installments as the
Committee may specify.
B. Once an installment becomes exercisable it shall remain
exercisable until expiration or termination of the option, unless otherwise
specified by the Committee.
C. Each option or installment may be exercised at any time or from
time to time, in whole or in part, for up to the total number of shares
with respect to which it is then exercisable.
D. The Committee shall have the right to accelerate the date of
exercise of any installment of any Option; provided that the Committee
shall not accelerate the exercise date of any installment of any option
granted to any employee as an ISO (and not previously converted into a Non-
Qualified Option pursuant to paragraph 16) if such acceleration would
violate the annual vesting limitation contained in Section 422A(b)(7) of
the Code, as described in paragraph 6(C).
9. Termination of Employment. If an ISO optionee ceases to be
-------------------------
employed by the Company and all Related Corporations other than by reason of
death or disability as defined in paragraph 10, no further installments of his
ISOs shall become exercisable, and his ISOs shall terminate after the passage of
60 days from the date of termination of his employment, but in no event later
than on their specified expiration dates, except to the extent that such ISOs
(or unexercised installments thereof) have been converted into Non-Qualified
options pursuant to paragraph 16. Employment shall be considered as continuing
uninterrupted during any bona fide leave of absence (such as those attributable
to illness, military obligations or governmental service) provided that the
period of such leave does not exceed 90 days or, if longer, any period during
which such optionee's right to reemployment is guaranteed by statute. A bona
fide leave of absence with the written approval of the Committee shall not be
considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any Related Corporation
to continue the employment of the employee after the approved period of absence.
ISOs granted under the Plan shall not be affected by any change of employment
within or among the Company and Related Corporations, so long the optionee
continues to be an employee of the Company or any Related Corporation. Nothing
in the Plan shall be deemed to give any grantee of any Stock Right the right to
be retained in employment or other service by the Company or any Related
Corporation for any period of time.
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<PAGE>
10. Death; Disability. If an ISO optionee ceases to be employed by
-----------------
the Company and all Related Corporations by reason of his death, any ISO of his
may be exercised, to the extent of the number of shares with respect to which he
could have exercised it on the date of his death, by his estate, personal
representative or beneficiary who has acquired the ISO by will or by the laws of
descent and distribution, at any time prior to the earlier of the 180 Day,
ISO's specified expiration date or 180 days from the date of the optionee's
death.
If an ISO optionee ceases to be employed by the Company and all Related
Corporations by reason of his disability, he shall have the right to exercise
any ISO held by him on the date of termination of employment, to the extent of
the number of shares with respect to which he could have exercised it on that
date, at any time prior to the earlier of the ISO's specified expiration date or
180 days from the date of the termination of the optionee's employment. For the
purposes of the Plan, the term "disability" shall mean "permanent and total
disability" as defined in Section 22(e)(3) of the Code or successor statute.
11. Assignability. No Stock Right shall be assignable or transferable
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by the grantee except by will or by the laws of descent and distribution, and
during the lifetime of the grantee each Stock Right shall be exercisable only by
him.
12. Terms and Conditions of Options. Options shall be evidenced by
-------------------------------
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. In granting any Non-Qualified option, the
Committee may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to ISOs, or to such other termination
and cancellation provisions as the Committee may determine. The Committee may
from time to time confer authority and responsibility on one or more of its own
members and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
13. Adjustments. Upon the happening of any of the following described
-----------
events, an optionee's rights with respect to Options granted to him hereunder,
and the recipient's rights with respect to Common Stock acquired pursuant to a
Purchase or Award hereunder, shall be adjusted as hereinafter provided, unless
otherwise specifically provided in the written agreement between the recipient
and the Company relating to such Stock Right.
A. In the event shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if, upon a merger,
consolidation, reorganization, split-up, liquidation, combination,
recapitalization or the like of the Company, the shares of Common Stock
shall be exchanged for other securities of the Company or of another
corporation, each grantee of a Stock Right shall be entitled, subject to
the conditions herein stated, to purchase such number of shares of Common
Stock or amount of other
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<PAGE>
securities of the Company or such other corporation as were exchangeable
for the number of shares of Common Stock which such grantee would have been
entitled to purchase except for such action, and appropriate adjustments
shall be made in the purchase price per share to reflect such subdivision,
combination or exchange; and
B. In the event the Company shall issue any of its shares as a stock
dividend upon or with respect to the shares of stock of the class which at
the time shall be subject to a Stock Right hereunder, each grantee upon
exercising a Stock Right shall be entitled to receive (for the purchase
price paid upon such exercise) the shares as to which he is exercising his
Stock Right and, in addition thereto (at no additional cost), such number
of shares of the class or classes in which such stock dividend or dividends
were declared or paid, and such amount of cash in lieu of fractional
shares, as he would have received if he had been the holder of the shares
as to which he is exercising his Stock Right at all times between the date
of grant of such Stock Right and the date of its exercise.
C. If any person or entity owning restricted Common Stock obtained
by exercise of a Stock Right made hereunder receives new or additional or
different shares or securities ("New Securities") in connection with a
corporate transaction described in subparagraph A above or a stock dividend
described in subparagraph B above as a result of owning such restricted
Common Stock, such New Securities shall be subject to all of the-conditions
and restrictions applicable to the restricted Common Stock with respect to
which such New Securities were issued.
D. Notwithstanding the foregoing, any adjustments made pursuant to
subparagraphs, A or 8 with respect to ISOs shall be made only after the
Committee, after consulting with counsel for the Company, determines
whether such adjustments would constitute a "modification" of such ISOs (as
that term is defined in Section 425 of the Code) or would cause any adverse
tax consequences for the holders of such ISOs. If the Committee determines
that such adjustments made with respect to ISOs would constitute a
modification of such ISOs, it may refrain from making such adjustments.
E. No adjustments shall be made for dividends paid in cash or in
property other than securities of the Company.
F. No fractional shares shall actually be issued under the Plan.
Any fractional shares which, but for this subparagraph F, would have been
issued to a grantee pursuant to a Stock Right shall be deemed to have been
issued and immediately sold to the Company for their fair market value, and
the grantee shall receive from the Company cash in lieu of such fractional
shares.
G. Upon the happening of any of the foregoing events described in
subparagraphs A or B above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or
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<PAGE>
subsequently may be granted under the Plan shall also be appropriately
adjusted to reflect the events described in such subparagraphs. The
Committee shall determine the specific adjustments to be made under this
paragraph 13 and, subject to paragraph 2, its determination shall be
conclusive.
14. Means of Exercising Stock Rights. A Stock Right (or any part or
--------------------------------
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Stock Right
being exercised and specify the number of shares as to which such Stock Right is
being exercised, accompanied by full payment of the purchase price therefor
either (a) in United States dollars in cash or by check, or (b) at the
discretion of the Committee, through delivery of shares of Common Stock having
fair. market value equal as of the date of the exercise to the cash exercise
price of the Stock Right, or (c) at the discretion of the Committee, by delivery
of the grantee's personal recourse note bearing interest payable not less than
annually at no less than 100% of the lowest applicable Federal rate, as defined
in 51274(d) of the Code, or (d) at the discretion of the Committee, by any
combination of (a), (b) and (c) above. If the Committee exercises its
discretion to permit payment of the exercise price of an ISO by means of the
methods set forth in clauses (b), (c), or (d) of the preceding sentence, such
discretion shall be exercised in writing at the time of the grant of the ISO in
question. The holder of a Stock Right shall not have the rights of a
shareholder with respect to the shares covered by his Stock Right until the date
of issuance of a stock certificate to him for such shares. Except as expressly
provided above in paragraph 13 with respect to changes in capitalization and
stock dividends, no adjustment shall be made for dividends or similar rights for
which the record date is before the date such stock certificate is issued.
15. Term and Amendment of Plan. This Plan was adopted by the Board on
--------------------------
May 18, 1987, subject to approval of the Plan by the holders of a majority of
the outstanding shares of Common Stock of the Company at the next Meeting of
Stockholders or by the unanimous written consent of the holders of the
outstanding shares of Common Stock of the Company. The Plan shall expire on May
17, 1997 (except as to Options outstanding on that date). Subject to the
provisions of paragraph 5 above, Stock Rights may be granted under the Plan
prior to the date of stockholder approval of the Plan. If the approval of
Stockholders is not obtained by May 17, 1988, any grants of ISOs under the Plan
made prior to that date will be rescinded. The Board may terminate or amend the
Plan in any respect at any time, except that, without the approval of such
Stockholders obtained within 12 months before or after the Board adopts a
resolution authorizing any of the following actions: (a) the total number of
shares that may be issued under the Plan may not be increased (except by
adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3
regarding eligibility for grants of ISOs may not be modified; (c) the provisions
of paragraph 6(B) regarding the exercise price at which shares may be offered
pursuant to ISOS may not be modified (except by adjustment pursuant to paragraph
13); and (d) the expiration date of the Plan may not be extended. Except as
provided in the fourth sentence of this paragraph 15, in no event may action of
the Board or Stockholders alter or impair the rights of a grantee, without his
consent, under any Stock Right previously granted to him.
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<PAGE>
16. Conversion of ISOs into Non-Qualified Options; Termination of
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ISOs. The Committee at the written request of any optionee, may in its
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discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but not be limited to, extending the exercise period
or reducing the exercise price of the appropriate installments of such Options.
At the time of such conversion, the Committee (with the consent of the Optionee)
may impose such conditions on the exercise of the resulting Non-Qualified
options as the Committee in its discretion may determine, provided that such
conditions shall not be inconsistent with this Plan. Nothing in the Plan shall
be deemed to give any optionee the right to have such optionee's ISOs converted
into Non-Qualified Options, and no such conversion shall occur until and unless
the Committee taken appropriated action. The Committee, with the consent of the
optionee, may also terminate any portion of any ISO that has not been exercised
at the time of such termination.
17. Application Of Funds. The proceeds received by the Company from
--------------------
the sale of shares pursuant to Options granted and Purchases authorized under
the Plan shall be used for general corporate purposes.
18. Governmental Regulation. The Company's obligation to sell and
-----------------------
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
19. Withholding of Additional Income Taxes. Upon the exercise of a
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Non-Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 20) or the vesting of restricted Common
Stock acquired on the exercise of a Stock Right hereunder, the Company, in
accordance with Section 3402(a) of the Code, may require the optionee, Award
recipient or purchaser to pay additional withholding taxes in respect of the
amount that is considered compensation includible in such person's gross income.
The Committee in its discretion may condition (i) the exercise of an option,
(ii) the grant of an Award, (iii) the making of a Purchase of Common Stock for
less than its fair market value, or (iv) the vesting of restricted Common Stock
acquired by exercising a Stock Right on the grantee's payment of such additional
withholding taxes.
20. Notice to Company of Disqualifying Disposition. Each employee who
----------------------------------------------
receives an ISO must agree to notify the Company in writing immediately after
the employee makes a Disqualifying Disposition of any Common Stock acquired
pursuant to the exercise of an ISO. A Disqualifying Disposition is any
disposition (including any sale) of such Common Stock before the later of (a)
two years after the date the employee was granted the ISO or (b) one year after
the date the employee acquired Common Stock by exercising the ISO. If the
employee has died
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<PAGE>
before such stock is sold, these holding period requirements do not apply and no
Disqualifying Disposition can occur thereafter.
21. Governing Law; Construction. The validity and construction of the
---------------------------
Plan and the instruments evidencing Stock Rights shall be governed by the laws
of the State of Massachusetts. In construing this Plan, the singular shall
include the plural and the masculine gender shall include the feminine and
neuter, unless the context otherwise requires.
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<PAGE>
BRIGHT HORIZONS CHILDREN'S CENTERS, INC.
EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of this Equity Incentive Plan (the "Plan") is to advance the
interests of Bright Horizons Children's Centers, Inc. (the "Company") by
enhancing its ability to attract and retain employees and other persons or
entities who are in a position to make significant contributions to the success
of the Company and its subsidiaries through ownership of shares of the Company's
common stock ("Stock").
The Plan is intended to accomplish these goals by enabling the Company to
grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock
or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans
or Supplement Grants, or combinations thereof, all as more fully described
below.
2. ADMINISTRATION
Unless otherwise determined by the Board of Directors of the Company (the
"Board"), the Plan will be administered by a Committee of the Board designated
for such purpose (the "Committee"). The Committee shall consist of at least two
directors. A majority of the members of the Committee shall constitute a
quorum, and all determinations of the Committee shall be made by a majority of
its members. Any determination of the Committee under the Plan may be made
without notice or meeting of the Committee by a writing signed by a majority of
the Committee members.
The Committee will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under the
Plan, to (a) grant Awards at such time or times as it may choose; (b) determine
the size of each Award, including the number of shares of Stock subject to the
Award; (c) determine the type or types of each Award; (d) determine the terms
and conditions of each Award; (e) waive compliance by a holder of an Award with
any obligations to be performed by such holder under an Award and waive any
terms or conditions of an Award; (f) amend or cancel an existing Award in whole
or in part (and if an award is canceled, grant another Award in its place on
such terms and conditions as the Committee shall specify), except that the
Committee may not, without the consent of the holder of an Award, take any
action under this clause with respect to such Award if such action would
adversely affect the rights of such holder; (g) prescribe the form or forms of
instruments that are required or deemed appropriate under the Plan, including
any written notices and elections required of Participants (as defined below),
and change such forms from time to time; (h) adopt, amend and rescind rules and
regulations for the administration of the Plan; and (i) interpret the Plan and
decide any questions and settle all controversies and disputes that may arise in
connection with the Plan.
<PAGE>
Such determinations and actions of the Committee, and all other determinations
and actions of the Committee made or taken under authority granted by any
provision of the Plan, will be conclusive and will bind all parties. Nothing in
this paragraph shall be construed as limiting the power of the Committee to make
adjustments under Section 7.3 or Section 8.6.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan will become effective on the date on which it is approved by the
stockholders of the Company. No Award may be granted under the Plan more than
ten years following the date of stockholder approval, but Awards previously
granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to the adjustment as provided in Section 8.6 below, the aggregate
number of shares of Stock that may be delivered under the Plan will be 200,000.
If any Award requiring exercise by the Participant for delivery of Stock
terminates without having been exercised in full, or if any Award payable in
Stock or cash is satisfied in cash rather than Stock, the number of shares of
Stock as to which such Award was not exercised or for which cash was substituted
will be available for future grants. Shares of stock delivered to satisfy the
exercise price of an Award or the tax consequences of the exercise or vesting of
an Award will be available for further grants.
Subject to Section 8.6(a), the maximum number of shares of Stock as to
which Options and Stock Appreciation Rights may be granted to any Participant in
any one calendar year is 50,000, which limitation shall be construed and applied
consistently with the rules under Section 162(m) of the Internal Revenue Code.
Stock delivered under the Plan may be either authorized but unissued Stock
or previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
5. ELIGIBILITY AND PARTICIPATION
Each person in the employ of the Company or any of its subsidiaries (an
"Employee") and each other person or entity (including without limitation
Employee and non-Employee directors of the Company or a subsidiary of the
Company) who, in the opinion of the Committee, is in a position to make a
significant contribution to the success of the Company or its subsidiaries will
be eligible to receive Awards under the Plan (each such Employee, person or
entity receiving an Award, "a Participant"). A "subsidiary" for purposes of the
Plan will be a corporation in which the Company owns, directly or indirectly,
stock possessing 50% or more of the total combined voting power of all classes
of stock.
6. TYPES OF AWARDS
-2-
<PAGE>
6.1. Options
(a) Nature of Options. An Option is an Award giving the recipient the
-----------------
right on exercise thereof to purchase Stock.
Both "incentive stock options," as defined in Section 422 of the Internal
Revenue of 1986, as amended (the "Code") (any Option intended to qualify as an
incentive stock option being hereinafter referred to as an "ISO"), and Options
that are not incentive stock options, may be granted under the Plan. ISOs shall
be awarded only to Employees. Any Option not identified at the time of grant as
being either an ISO or a non-incentive stock option shall be a non-incentive
stock option.
(b) Exercise Price. The exercise price of an Option will be determined
--------------
by the Committee subject to the following:
(1) The exercise price of an ISO shall not be less than 100% (110%
in the case of an ISO granted to a ten-percent stockholder) of the fair
market value of the Stock subject to the Option, determined as of the
time the Option is granted. A "ten-percent stockholder" is any person who
at the time of grant owns, directly or indirectly, or is deemed to own by
reason of the attribution rules of section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of any of its subsidiaries.
(2) In no case may the exercise price paid for Stock which is part
of an original issue of authorized Stock be less than the par value per
share of the Stock .
(3) The Committee may reduce the exercise price of an Option at any
time after the time of grant, but in the case of an Option originally
awarded as an ISO, only with the consent of the Participant.
(c) Duration of Options. The latest date on which an Option may be
-------------------
exercised will be the tenth anniversary (fifth anniversary, in the case of an
ISO granted to a ten-percent shareholder) of the day immediately preceding the
date the Option was granted, or such earlier date as may have been specified by
the Committee at the time the Option was granted.
(d) Exercise of Options. An Option will become exercisable at such time
-------------------
or times, and on such conditions, as the Committee may specify. The Committee
may at any time and from time to time accelerate the time at which all or any
part of the Option may be exercised.
Any exercise of an Option must be in writing, signed by the proper person
and delivered or mailed to the Company, accompanied by (1) any documents
required by the Committee and (2) payment in full in accordance with paragraph
(e) below for the number of shares for which the Option is exercised.
-3-
<PAGE>
(e) Payment for Stock. Stock purchased on exercise of an Option must be
-----------------
paid for as follows: (1) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or money
order payable to the order of the Company or (2) if so permitted by the
Committee at or after the grant of the Option (with the consent of the optionee
of an ISO if permitted after the grant) or by the instrument evidencing the
Option, (i) through the delivery of shares of Stock which have been outstanding
for at least six months (unless the Committee approves a shorter period) and
which have a fair market value equal to the exercise price, (ii) by delivery of
a promissory note of the person exercising the Option to the Company, payable on
such terms as are specified by the Committee, (iii) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or (iv) by any combination
of the foregoing permissible forms of payment.
(f) Discretionary Payments. If (i) the market price of shares of Stock
----------------------
subject to an Option (other than an Option which is in tandem with a Stock
Appreciation Right as described in Section 6.2 below) exceeds the exercise price
of the Option at the time of its exercise, and (ii) the person exercising the
Option so requests the Committee in writing, the Committee may in its sole
discretion cancel the Option and cause the Company to pay in cash or in shares
of Common Stock (at a price per share equal to the fair market value per share)
to the person exercising the Option an amount equal to the difference between
the fair market value of the Stock which would have been purchased pursuant to
the exercise (determined on the date the Option is canceled) and the aggregate
exercise price which would have been paid.
6.2. Stock Appreciation Rights.
(a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is
-----------------------------------
an Award entitling the holder on exercise to receive an amount in cash or Stock
or a combination thereof (such form to be determined by the Committee)
determined in whole or in part by reference to appreciation in the fair market
value of a share of Stock on the date of grant as compared to its fair market
value on the date of exercise or any performance standard selected or
established by the Committee.
(b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
----------------------------------
granted in tandem with, or independently of, Options granted under the Plan. A
Stock Appreciation Right granted in tandem with an Option which is not an ISO
may be granted either at or after the time the Option is granted. A Stock
Appreciation Right granted in tandem with an ISO may be granted only at the time
the Option is granted. The Committee may also grant Stock Appreciation Rights
which provide that following a change in control of the Company, as determined
by the Committee, the holder of such Right will be entitled to receive, with
respect to each share of Stock subject to the Right, an amount equal to the
excess of a specified value (which may include an average of values) for a share
of Stock during a period preceding such change in control over the fair market
value of a share of Stock on the date the Right was granted.
-4-
<PAGE>
(c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights
---------------------------------
are granted in tandem with Options, the following will apply:
(1) The Stock Appreciation Right will be exercisable only at such
time or times, and to the extent, that the related Option is exercisable
and will be exercisable in accordance with the procedure required for
exercise of the related Option.
(2) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except
that a Stock Appreciation Right granted with respect to less than the full
number of shares covered by an Option will not be reduced until the number
of shares as to which the related Option has been exercised or has
terminated exceeds the number of shares not covered by the Stock
Appreciation Right.
(3) The Option will terminate and no longer be exercisable upon the
exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right will be transferable only with the
related Option.
(5) A Stock Appreciation Right granted in tandem with an ISO may be
exercised only when the market price of the Stock subject to the Option
exceeds the exercise price of such option.
(d) Exercise of Independent Stock Appreciation Rights. A Stock
-------------------------------------------------
Appreciation Right not granted in tandem with an Option will become exercisable
at such time or times, and on such conditions, as the Committee may specify.
The Committee may at any time accelerate the time at which all or any part of
the Right may be exercised.
Any exercise of an independent Stock Appreciation Right must be in writing,
signed by the proper person and delivered or mailed to the Company, accompanied
by any other documents required by the Committee.
6.3. Restricted and Unrestricted Stock.
(a) Grant of Restricted Stock. Subject to the terms and provisions of
-------------------------
the Plan, the Committee, at any time and from time to time, may grant shares of
Restricted Stock in such amounts and upon such terms and conditions as the
Committee shall determine subject to the restrictions described below.
(b) Restricted Stock Agreement. The Committee may require, as a
--------------------------
condition to an Award, that a recipient of a Restricted Stock Award enter into a
Restricted Stock Award Agreement, setting forth the terms and conditions of the
Award. In lieu of a Restricted Stock
-5-
<PAGE>
Award Agreement, the Committee may provide the terms and conditions of an Award
in a notice to the Participant of the Award, on the Stock certificate
representing the Restricted Stock, in the resolution approving the Award, or in
such other manner as it deems appropriate.
(c) Transferability and Other Restrictions. Except as otherwise provided
--------------------------------------
in this Section 6.3, the shares of Restricted Stock granted herein may not be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated
until the end of the applicable period or periods established by the Committee
and the satisfaction of any other conditions or restrictions established by the
Committee (such period during which a share of Restricted Stock is subject to
such restrictions and conditions is referred to as the "Restricted Period").
Except as the Committee may otherwise determine, if a Participant ceases to be
an Employee or otherwise suffers a Status Change (as defined at Section 7.2(a)
below) for any reason during the Restricted Period, the Company may purchase the
shares of Restricted Stock subject to such restrictions and conditions for the
amount of cash paid by the Participant for such shares, or such shares of
Restricted Stock shall be forfeited to the Company if no cash was paid by the
Participant.
The Company shall also have the right to retain the certificates
representing shares of Restricted Stock in the Company's possession during the
Restricted Period.
(d) Removal of Restrictions. Except as otherwise provided in this
-----------------------
Section 6.3, a share of Restricted Stock covered by a Restricted Stock grant
shall become freely transferable by the Participant upon completion of the
Restricted Period including the passage of any applicable period of time and
satisfaction of any conditions to vesting. However, unless otherwise provided by
the Committee, the Committee, in its sole discretion, shall have the right to
immediately waive all or part of the restrictions and conditions with regard to
all or part of the shares held by any Participant at any time.
(e) Voting Rights, Dividends and Other Distributions. During the
------------------------------------------------
Restricted Period, Participants holding shares of Restricted Stock granted
hereunder may exercise full voting rights and shall receive all regular cash
dividends paid with respect to such shares. Except as the Committee shall
otherwise determine, any other cash dividends and other distributions paid to
Participants with respect to shares of Restricted Stock including any dividends
and distributions paid in shares shall be subject to the same restrictions and
conditions as the shares of Restricted Stock with respect to which they were
paid.
(f) Other Awards Settled with Restricted Stock. The Committee may, at
------------------------------------------
the time any Award described in this Section 6 is granted, provide that any or
all the Stock delivered pursuant to the Award will be Restricted Stock.
(g) Unrestricted Stock. The Committee may, in its sole discretion, sell
------------------
any Participant shares of Stock free of restrictions under the Plan for a price
which is not less than the par value of the Stock.
-6-
<PAGE>
(h) Notice of Section 83(b) Election. Any Participant making an election
--------------------------------
under Section 83(b) of the Code with respect to Restricted Stock must provide a
copy thereof to the Company within 10 days of filing such election with the
Internal Revenue Service.
6.4. Deferred Stock.
A Deferred Stock Award entitles the recipient to receive shares of Stock to
be delivered in the future. Delivery of the Stock will take place at such time
or times, and on such conditions, as the Committee may specify. The Committee
may at any time accelerate the time at which delivery of all or any part of the
Stock will take place. At the time any Award described in this Section 6 is
granted, the Committee may provide that, at the time Stock would otherwise be
delivered pursuant to the Award, the Participant will instead receive an
instrument evidencing the Participant's right to future delivery of Deferred
Stock.
6.5. Performance Awards; Performance Goals.
(a) Nature of Performance Awards. A Performance Award entitles the
----------------------------
recipient to receive, without payment, an amount in cash or Stock or a
combination thereof (such form to be determined by the Committee) following the
attainment of performance goals. Performance goals may be related to personal
performance, corporate performance, departmental performance or any other
category of performance established by the Committee. The Committee will
determine the performance goals, the period or periods during which performance
is to be measured and all other terms and conditions applicable to the Award.
(b) Other Awards Subject to Performance Condition. The Committee may, at
---------------------------------------------
the time any Award described in this Section 6 is granted, impose the condition
(in addition to any conditions specified or authorized in this Section 6 or any
other provision of the Plan) that Performance Goals be met prior to the
Participant's realization of any payment or benefit under the Award.
6.6. Loans and Supplemental Grants.
(a) Loans. The Company may make a loan to a Participant ("Loan"), either
-----
on the date of or after the grant of any Award to the Participant. A Loan may
be made either in connection with the purchase of Stock under the Award or with
the payment of any Federal, state and local income tax with respect to income
recognized as a result of the Award. The Committee will have full authority to
decide whether to make a Loan and to determine the amount, terms and conditions
of the Loan, including the interest rate (which may be zero), whether the Loan
is to be secured or unsecured or with or without recourse against the borrower,
the terms on which the Loan is to be repaid and the conditions, if any, under
which it may be forgiven. However, no Loan may have a term (including
extensions) exceeding ten years in duration.
-7-
<PAGE>
(b) Supplemental Grants. In connection with any Award, the Committee may
-------------------
at the time such Award is made or at a later date, provide for and grant a cash
award to the Participant ("Supplemental Grant") not to exceed an amount equal to
(1) the amount of any Federal, state and local income tax on ordinary income for
which the Participant may be liable with respect to the Award, determined by
assuming taxation at the highest marginal rate, plus (2) an additional amount on
a grossed-up basis intended to make the Participant whole on an after-tax basis
after discharging all the Participant's income tax liabilities arising from all
payments under this Section 6. Any payments under this subsection (b) will be
made at the time the Participant incurs Federal income tax liability with
respect to the Award.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. Death.
If a Participant dies, the following will apply:
(a) All Options and Stock Appreciation Rights held by the Participant
immediately prior to death, to the extent then exercisable, may be exercised by
the Participant's executor or administrator or the person or persons to whom the
Option or Right is transferred by will or the applicable laws of descent and
distribution, at any time within the one year period ending with the first
anniversary of the Participant's death (or such shorter or longer period as the
Committee may determine), and shall thereupon terminate. In no event, however,
shall an Option or Stock Appreciation Right remain exercisable beyond the latest
date on which it could have been exercised without regard to this Section 7.
Except as otherwise determined by the Committee, all Options and Stock
Appreciation Rights held by a Participant immediately prior to death that are
not then exercisable shall terminate at death.
(b) Except as otherwise determined by the Committee, all Restricted Stock
held by the Participant must be transferred to the Company (and, in the event
the certificates representing such Restricted Stock are held by the Company,
such Restricted Stock will be so transferred without any further action by the
Participant) in accordance with Section 6.3(d) above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to death will be forfeited and the Award canceled as of the time
of death, unless otherwise determined the Committee.
7.2. Termination of Service (Other Than By Death).
If a Participant who is an Employee ceases to be an Employee for any reason
other than death, or if there is a termination (other than by reason of death)
of the consulting, service or similar relationship in respect of which a non-
Employee Participant was granted an Award
-8-
<PAGE>
hereunder (such termination of the employment or other relationship being
hereinafter referred to as a "Status Change"), the following will apply:
(a) Except as otherwise determined by the Committee, all Options and
Stock Appreciation Rights held by the Participant that were not exercisable
immediately prior to the Status Change shall terminate at the time of the Status
Change. Any Options or Rights that were exercisable immediately prior to the
Status Change will continue to be exercisable for a period of three months (or
such longer period as the Committee may determine), and shall thereupon
terminate, unless the Award provides by its terms for immediate termination in
the event of a Status Change (unless otherwise determined by the Committee) or
unless the Status Change results from a discharge for cause which in the opinion
of the Committee casts such discredit on the Participant as to justify immediate
termination of the Award (unless otherwise determined by the Committee). In no
event, however, shall an Option or Stock Appreciation Right remain exercisable
beyond the latest date on which it could have been exercised without regard to
this Section 7. For purposes of this paragraph, in the case of a Participant who
is an Employee, a Status Change shall not be deemed to have resulted by reason
of (i) a sick leave or other bona fide leave of absence approved for purposes of
the Plan by the Committee, so long as the Employee's right to reemployment is
guaranteed either by statute or by contract, or (ii) a transfer of employment
between the Company and a subsidiary or between subsidiaries, or to the
employment of a corporation (or a parent or subsidiary corporation of such
corporation) issuing or assuming an option in a transaction to which section
424(a) of the Code applies.
(b) Except as otherwise determined by the Committee, all Restricted Stock
held by the Participant at the time of the Status Change must be transferred to
the Company (and, in the event the certificates representing such Restricted
Stock are held by the Company, such Restricted Stock will be so transferred
without any further action by the Participant) in accordance with Section 6.3
(c) above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to the Status Change will be forfeited and the Award cancelled as
of the date of such Status Change unless otherwise determined by the Committee.
7.3. Certain Corporate Transactions.
Except as otherwise provided by the Committee at the time of grant, in the
event of a consolidation or merger in which stockholders of the Company
immediately prior to the transaction will not have ultimate beneficial ownership
of a majority of the voting stock of the entity surviving the merger or
consolidation or which results in the acquisition of substantially all the
Company's outstanding Stock by a single person or entity or by a group of
persons and/or entities acting in concert, or in the event of the sale or
transfer of substantially all the Company's assets or a dissolution or
liquidation of the Company (a "covered transaction"), the following rules shall
apply:
-9-
<PAGE>
(a) Subject to paragraphs (b) below, all outstanding Awards requiring
exercise will cease to be exercisable, and all other Awards to the extent not
fully vested (including Awards subject to conditions not yet satisfied or
determined) will be forfeited, as of the effective time of the covered
transaction, provided that the Committee may in its sole discretion, on or prior
to the effective date of the covered transaction, (1) make any outstanding
Option and Stock Appreciation Right exercisable in full, (2) remove the
restrictions from any Restricted Stock, (3) cause the Company to make any
payment and provide any benefit under any Deferred Stock Award, Performance
Award or Supplemental Grant, (4) remove any performance or other conditions or
restrictions on any Award, and (5) forgive all or any portion of the principal
of or interest on a Loan; or
(b) With respect to an outstanding Award held by a participant who,
following the covered transaction, will be employed by or otherwise providing
services to a corporation which is a surviving or acquiring corporation in the
covered transaction or an affiliate of such a corporation, (i) in any covered
transaction to be accounted for as a pooling of interests, the Committee shall,
and (ii) in any other covered transaction, the Committee, in its sole
discretion, may, at or prior to the effective time of the covered transaction,
and in lieu of the action described in paragraph (a) above, arrange to have such
surviving or acquiring corporation or affiliate assume any Award held by such
participant outstanding hereunder or grant a replacement award which, in the
judgment of the Committee, is substantially equivalent to any Award being
replaced.
8. GENERAL PROVISIONS
8.1. Documentation of Awards.
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Committee from time to time. Such instruments may be in the
form of agreements to be executed by both the Participant and the Company, or
certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms
thereof.
8.2. Rights as a Stockholder, Dividend Equivalents.
Except as specifically provided by the Plan, the receipt of an Award will
not give a Participant rights as a stockholder; the Participant will obtain such
rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Committee may,
on such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of cash dividends that would have been payable on any
or all Stock subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Committee may provide for payment to the Participant of
amounts representing such dividends, either currently or in the future, or for
the investment of such amounts on behalf of the Participant.
-10-
<PAGE>
8.3. Conditions on Delivery of Stock.
The Company will not be obligated to deliver any shares of Stock pursuant
to the Plan or to remove restriction from shares previously delivered under the
Plan (a) until all conditions of the Award have been satisfied or removed, (b)
until, in the opinion of the Company's counsel, all applicable Federal and state
laws and regulation have been complied with, (c) if the outstanding Stock is at
the time listed on any stock exchange or The Nasdaq National Market, until the
shares to be delivered have been listed or authorized to be listed on such
exchange or market upon official notice of notice of issuance, and (d) until all
other legal matters in connection with the issuance and delivery of such shares
have been approved by the Company's counsel. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the Award, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.
If an Award is exercised by the Participant's legal representative, the
Company will be under no obligation to deliver Stock pursuant to such exercise
until the Company is satisfied as to the authority of such representative.
8.4. Tax Withholding.
The Company will withhold from any cash payment made pursuant to an Award
an amount sufficient to satisfy all federal, state and local withholding tax
requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the
Committee will have the right to require that the Participant or other
appropriate person remit to the Company an amount sufficient to satisfy the
withholding requirements, or make other arrangements satisfactory to the
Committee with regard to such requirements, prior to the delivery of any Stock.
If and to the extent that such withholding is required, the Committee may permit
the Participant or such other person to elect at such time and in such manner as
the Committee provides to have the Company hold back from the shares to be
delivered, or to deliver to the Company, Stock having a value calculated to
satisfy the withholding requirement. The Committee may make such share
withholding mandatory with respect to any Award at the time such Award is made
to a Participant.
If at the time an ISO is exercised the Committee determines that the
Company could be liable for withholding requirements with respect to a
disposition of the Stock received upon exercise, the Committee may require as a
condition of exercise that the person exercising the ISO agree (a) to inform the
Company promptly of any disposition (within the meaning of section 424(c) of the
Code) of Stock received upon exercise, and (b) to give such security as the
Committee deems adequate to meet the potential liability of the Company for the
withholding
-11-
<PAGE>
requirements and to augment such security from time to time in any amount
reasonably deemed necessary by the Committee to preserve the adequacy of such
security.
8.5. Nontransferability of Awards.
Unless otherwise permitted by the Committee, no Award (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).
8.6. Adjustments in the Event of Certain Transactions.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution to common stockholders other than normal cash dividends,
after the effective date of the Plan, the Committee will make any appropriate
adjustments to the maximum number of shares that may be delivered under the Plan
under Section 4 above.
(b) In any event referred to in paragraph (a), the Committee will also
make any appropriate adjustments to the number and kind of shares of stock or
securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provision of Awards affected by
such change. The Committee may also make such adjustments to take into account
material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions or similar corporate transactions, or
any other event, if it is determined by the Committee that adjustments are
appropriate to avoid distortion in the operation of the Plan.
(c) In the case of ISOs or for purposes of the limits set forth in the
second paragraph of Section 4, the adjustments described in (a) and (b) will be
made only to the extent consistent with continued qualification of the option
under Section 422 of the Code (in the case of an ISO) or Section 162(m) of the
Code (in the case of the limits in Section 4).
8.7. Employment Rights, Etc.
Neither the adoption of the Plan nor the grant of Awards will confer upon
any person any right to continued retention by the Company or any subsidiary as
an Employee or otherwise, or affect in any way the right of the Company or
subsidiary to terminate an employment, service or similar relationship at any
time. Except as specifically provided by the Committee in any particular case,
the loss of existing or potential profit in Awards granted under the Plan will
not constitute an element of damages in the event of termination of an
employment, service or similar relationship even if the termination is in
violation of an obligation of the Company to the Participant.
-12-
<PAGE>
8.8. Deferral of Payments.
The Committee may agree at any time, upon request of the Participant, to
defer the date on which any payment under an Award will be made.
8.9. Past Services as Consideration.
Where a Participant purchases Stock under an Award for a price equal to the
par value of the Stock the Committee may determine that such price has been
satisfied by past services rendered by the Participant.
9. EFFECT, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant will
affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
Employees.
The Committee may at any time or times amend the Plan or any outstanding
Award for any purpose which may at the time be permitted by law, or may at any
time terminate the Plan as to any further grants of Awards, provided that
(except to the extent expressly required or permitted by the Plan) no such
amendment will, without the approval of the stockholders of the Company,
effectuate a change for which stockholder approval is required in order for the
Plan to continue to qualify for the award of ISOs under section 422 of the Code
or for the award of performance-based compensation under Section 162(m) of the
Code.
-13-
<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."
Price Waterhouse LLP
Boston, Massachusetts
October 29, 1996
<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
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<RECEIVABLES> 2,470,073
<ALLOWANCES> 307,458
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<CURRENT-ASSETS> 10,030,287
<PP&E> 11,870,157
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18,606,736
0
<COMMON> 3,304
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<INCOME-PRETAX> 315,831
<INCOME-TAX> (1,005,000)
<INCOME-CONTINUING> 510,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,320,831
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.51
</TABLE>
