<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 24, 1998
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-24699 62-1742957
- ---------------------------- ------------------------ -------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
One Kendall Square, Building 200
Cambridge, Massachusetts 02139
AND
209 Tenth Avenue South, Suite 300
Nashville, Tennessee 37203-4173
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 577-8020 and (615) 256-9915
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- --------------------------------------------------------------------------------
(a) Financial Statements of Businesses Acquired
(1) Historical restated audited pooled financial statements:
<TABLE>
<S> <C> <C>
- Reports of Independent Public Accountants 3
- Consolidated Balance Sheets at December 31, 1997 and
1996 5
- Consolidated Statements of Income for the fiscal
years ended December 31, 1997, 1996 and 1995 6
- Consolidated Statements of Stockholders Equity for
the fiscal years ended December 31, 1997, 1996 and
1995 7
- Consolidated Statements of Cash Flows for the fiscal
years ended December 31, 1997, 1996 and 1995 8
- Notes to Consolidated Financial Statements 9
- Schedule - Valuation and Qualifying Accounts 26
</TABLE>
2
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bright Horizons Family Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of BRIGHT HORIZONS
FAMILY SOLUTIONS, INC. (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996 and the related consolidated statements of income,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the June 30, 1996 balance sheet and the related statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended June 30, 1996, of Bright Horizons, Inc., a company acquired during 1998 in
a transaction accounted for as a pooling of interests, as discussed in Note 1.
Such statements are included in the consolidated financial statements of Bright
Horizons Family Solutions, Inc. as of December 31, 1996 and for each of the two
years in the period ended December 31, 1996 and reflect total assets of 55%
percent at December 31, 1996, and total revenues of 50% and 54% percent for the
years ended December 31, 1996 and 1995, respectively, of the related Bright
Horizons Family Solutions, Inc. consolidated totals. These statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to amounts included for Bright Horizons, Inc., is
based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Bright Horizons Family Solutions,
Inc. and subsidiaries as of December 31, 1997 and December 31, 1996 and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, based on our audits and
the reports of the other auditors, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Nashville, Tennessee
October 6, 1998
3
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Bright Horizons, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of changes in stockholders' equity and of cash flows (not
presented separately herein) present fairly, in all material respects, the
financial position of Bright Horizons, Inc. and its subsidiaries at June 30,
1996 and the results of their operations and their cash flows for each of the
two 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.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 1, 1996, except for the stock split
which is as of October 8, 1997, and
the adoption of SFAS 128 which is as of
May 14, 1998
4
<PAGE> 5
Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996
(Note 1) (Note 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 25,384 $ 7,497
Restricted cash 176 169
Accounts receivable, net of allowance for
doubtful accounts of $579,000 and
$431,000, respectively 9,003 8,773
Prepaid expenses and other current assets 2,605 1,090
Current deferred tax asset 2,688 3,254
-------- --------
Total current assets 39,856 20,783
Fixed assets, net 21,232 11,520
Deferred charges, net 692 640
Goodwill and other intangible assets, net 11,280 9,721
Noncurrent deferred tax asset 3,233 1,906
Other assets 549 246
-------- --------
Total assets $ 76,842 $ 44,816
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of Credit $ -- $ 500
Current portion of long term debt and
obligations under capital leases 80 1,396
Accounts payable and accrued expenses 14,647 10,549
Deferred revenue, current portion 4,612 3,105
Amounts held in escrow 176 169
Income taxes payable 962 226
Other current liabilities 1,374 701
-------- --------
Total current liabilities 21,851 16,646
Long term debt and obligations under
capital leases 703 7,752
Accrued rent 1,519 1,665
Other long term liabilities 2,771 2,566
Deferred revenue, net of current portion 3,335 1,820
-------- --------
30,179 30,449
-------- --------
Commitments and Contingencies
Redeemable preferred stock -- 23,087
-------- --------
Common stockholders' equity (deficit):
Common Stock $.01 par value, 30,000,000 shares
authorized, 10,854,000 shares issued and
outstanding at December 31, 1997 and 2,500,000 shares
issued and outstanding at June 30 and December 31,1996 108 24
Additional paid in capital 60,544 6,947
Accumulated deficit (13,989) (15,691)
-------- --------
Common stockholders' equity 46,663 (8,720)
-------- --------
Total liabilities and stockholders' equity $ 76,842 $ 44,816
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
5
<PAGE> 6
Bright Horizons Family Solutions, Inc.
Consolidated Statements of Income
(in thousands except per share data)
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996 Fiscal Year 1995
(Note 1) (Note 1) (Note 1)
<S> <C> <C> <C>
Revenue $ 172,555 $ 127,107 $ 80,613
Cost of services 149,312 111,351 69,989
--------- --------- --------
Gross profit 23,243 15,756 10,624
Selling, general and administrative 16,299 11,097 8,757
Amortization 1,056 2,229 470
Other charges (Note 9) 840 -- --
--------- --------- --------
Income from operations 5,048 2,430 1,397
Interest expense, net (44) (537) (65)
--------- --------- --------
Income before income taxes 5,004 1,893 1,332
Income tax (expense) benefit (2,243) 2,164 842
--------- --------- --------
Net Income before preferred stock dividends
and accretion on redeemable common stock 2,761 4,057 2,174
Preferred stock dividends and accretion on redeemable
common stock 917 1,127 1,127
--------- --------- --------
Net income available to common stockholders $ 1,844 $ 2,930 $ 1,047
========= ========= ========
Earnings per share - basic $ 0.43 $ 1.16 $ 0.47
========= ========= ========
Weighted average number of common shares - basic 4,333 2,522 2,227
========= ========= ========
Net income per share - diluted $ 0.30 $ 0.66 $ 0.28
========= ========= ========
Weighted average number of common and
common equivalent shares - diluted 9,293 4,502 7,665
========= ========= ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
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<PAGE> 7
Bright Horizons Family Solutions, Inc.
Consolidated Statement of Changes in Stockholders Equity
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Total
Shares Amount Paid In Deficit Stockholders
Capital Equity
<S> <C> <C> <C> <C> <C>
Balance June 30, 1994 / December 31, 1994 2,106 $ 21 $ 4,965 $ (19,668) $ (14,682)
Exercise of Options 2 -- 1 -- 1
Shares issued in connection with acquisition (Note 2) 325 3 1,747 -- 1,750
Accretion of preferred stock -- -- -- (1,127) (1,127)
Net income before preferred stock dividends and accretion on
redeemable common stock -- -- -- 2,174 2,174
------ ---- ------- -------- --------
Balance Fiscal Year 1995 2,433 24 6,713 (18,621) (11,884)
Issuance of non-qualified stock options (Notes 9 and 16) -- -- 100 -- 100
Exercise of options 34 -- 106 -- 106
Issuance of restricted common stock (Note 16) 33 -- 28 -- 28
Accretion of preferred stock -- -- -- (1,127) (1,127)
Net income before preferred stock dividends and accretion on
redeemable common stock -- -- -- 4,057 4,057
------ ---- ------- -------- --------
Balance Fiscal Year 1996 2,500 24 6,947 (15,691) (8,720)
Adjustment to conform fiscal year of Bright Horizons, Inc. (Note 1) 6 -- 5 (142) (137)
Exercise of options 183 2 399 -- 401
Exercise of warrants (Note 9) 350 4 165 -- 169
Shares issued in public stock offering 2,954 30 27,657 -- 27,687
Redemption of preferred stock for
common stock 4,736 47 24,432 -- 24,479
Shares issued in connection with acquisition (Note 2) 125 1 642 -- 643
Accretion of preferred stock -- -- -- (843) (843)
Common stock restriction removed (Notes 9 and 16) -- -- 297 -- 297
Accretion of redeemable common stock -- -- -- (74) (74)
Net income before preferred stock dividends and accretion on
redeemable common stock -- -- -- 2,761 2,761
------ ---- ------- -------- --------
Balance at December 31, 1997 10,854 $108 $60,544 $(13,989) $ 46,663
====== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
7
<PAGE> 8
Bright Horizons Family Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
<S> <C> <C> <C>
Net income before preferred stock dividends and accretion on
redeemable common stock $ 2,761 $ 4,057 $ 2,174
Adjustments to reconcile net income before preferred stock dividends and
accretion on redeemable common stock to net cash provided
by operating activities:
Depreciation and amortization 2,918 3,590 1,415
Non-cash expenses 297 68 --
Asset writedowns and loss on disposal of fixed assets 49 46 478
Decrease in goodwill from utilization of tax benefit 737 1,142 --
Deferred income taxes (770) (3,659) (938)
Changes in assets and liabilities:
Accounts receivable, trade (1,515) (2,831) (1,437)
Prepaid expenses and other current assets (665) 156 (118)
Accounts payable and accrued expenses 2,351 2,145 659
Income taxes payable 883 187 (33)
Deferred revenue 1,802 728 169
Accrued rent (82) (69) (21)
Other current and long-term liabilities 1,599 1,373 29
-------- ------- -------
Total adjustments 7,604 2,876 203
-------- ------- -------
Net cash provided by operating activities 10,365 6,933 2,377
-------- ------- -------
Cash flows from investing activities:
Additions to fixed assets, net of acquired amounts (10,670) (1,817) (2,494)
Proceeds from disposal of fixed assets 406 33 59
Increase in deferred charges (139) (87) (142)
Decrease in other assets 14 17 63
Payments for acquisitions (1,972) (3,067) (4,123)
-------- ------- -------
Net cash used for investing activities (12,361) (4,921) (6,637)
Cash flows from financing activities:
Proceeds from issuance of common stock 28,257 106 1
Net borrowings under line of credit -- 500 --
Principal payments of long term debt and
obligations under capital leases (9,661) (794) (526)
Borrowing of long term debt and
obligations under capital leases 724 -- 3,500
-------- ------- -------
Net cash provided by (used in) financing activities 19,320 (188) 2,975
-------- ------- -------
Net increase in cash and cash equivalents 17,324 1,824 (1,285)
Cash and cash equivalents, beginning of period 8,060 5,673 6,958
-------- ------- -------
Cash and cash equivalents, end of period $ 25,384 $ 7,497 $ 5,673
======== ======= =======
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
8
<PAGE> 9
Bright Horizons Family Solutions, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bright Horizons Family Solutions, Inc. (the "Company") was
incorporated under the laws of the state of Delaware on April 27, 1998 and
commenced substantive operations upon the completion of the merger by and
between Bright Horizons, Inc. ("BRHZ") and CorporateFamily Solutions, Inc.
("CFAM") on July 24, 1998 (the "Merger"). The Company provides workplace
services for employers and families including childcare, early education and
strategic worklife consulting throughout the United States.
The Company operates its family centers under various types of arrangements,
which generally can be classified in two forms: (i) the corporate-sponsored
model, where the Company operates a child development center on the premises of
a corporate sponsor and gives priority enrollment to the corporate sponsor's
employees and (ii) the management contract model, where the Company manages a
work-site family center under cost-plus arrangement, typically for a single
employer.
BUSINESS COMBINATION AND BASIS OF PRESENTATION -- On April 26, 1998 BRHZ and
CFAM entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement"). Pursuant to the Merger Agreement, BRHZ and CFAM have merged with
subsidiaries of the Company and are now wholly owned subsidiaries of the
Company. The Merger was approved by a vote of the stockholders of BRHZ and CFAM
on July 24, 1998, and is to be treated as a tax free reorganization and to be
accounted for as a pooling of interests. In the Merger, each share of BRHZ
common stock ("BRHZ Common Stock"), was exchanged for 1.15022 shares of the
Company's $.01 par value per share common stock ("Common Stock"), and each share
of CFAM common stock ("CFAM Common Stock") was exchanged for one share of Common
Stock. Each outstanding option to purchase shares of BRHZ Common Stock and CFAM
Common Stock has been converted into an option to purchase shares of the
Company's Common Stock at the same conversion ratios referenced above. The
accompanying consolidated financial statements have been restated to include the
financial position and results of operations for both BRHZ and CFAM for all
periods presented, unless otherwise indicated. All historical amounts have been
restated to reflect the respective exchange ratio, and certain reclassifications
have been made for consistent presentation, which had no effect on net income.
BRHZ operated on a fiscal year ended June 30. CFAM had a fiscal year ending on
the Friday closest to December 31. The Company will operate on a calendar year.
The accompanying consolidated financial statements combine financial position
and operating results as of and for the years ended December 31, 1997 and
January 2, 1998 ("Fiscal Year 1997") for BRHZ and CFAM, respectively, June 30,
1996 and December 27, 1996 ("Fiscal Year 1996") for BRHZ and CFAM, respectively,
and June 30, 1995 and December 29, 1995 ("Fiscal Year 1995") for BRHZ and CFAM,
respectively.
The results of operations for BRHZ and CFAM and the combined amounts presented
in the Company's consolidated financial statements are as follows:
9
<PAGE> 10
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues
BRHZ $ 94,833 $ 64,181 $43,693
CFAM 77,722 62,926 36,920
-------- -------- -------
$172,555 $127,107 $80,613
Net income before preferred
stock dividends and
accretion on redeemable
common stock
BRHZ $ 1,657 $ 1,321 $ 1,633
CFAM 1,104 2,736 541
-------- -------- -------
$ 2,761 $ 4,057 $ 2,174
Changes in common
stockholders equity
BRHZ $ 37,207 $ 232 $ 536
CFAM 18,313 2,932 2,262
-------- -------- -------
$ 55,520 $ 3,164 $ 2,798
</TABLE>
Due to the different fiscal year ends, BRHZ's results of operations for the six
month period ended December 31, 1996 are not included in the restated financial
statements for Fiscal Years 1997 or 1996. For this period, BRHZ had revenues of
$40 million, net income of $407,000 and total changes in common stockholders
equity of ($137,000). Accordingly, an adjustment has been included in the
Company's Consolidated Statement of Stockholders Equity for Fiscal 1997 to
reflect this activity.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, 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 EQUIVALENTS -- The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of high quality commercial paper. The carrying
value of these instruments approximates market value due to their short
maturities.
RESTRICTED CASH -- In connection with the acquisition of RCCM in 1995 (see Note
2), the Company is required to maintain cash in escrow pending the final
resolution of certain tax matters associated with RCCM prior to the acquisition
date. The majority of the tax matters were resolved in 1996.
FIXED ASSETS -- Property and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are generally charged to expense as
incurred, whereas expenditures for improvements and replacements are
capitalized.
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<PAGE> 11
The cost and accumulated depreciation of assets sold or otherwise disposed of
are removed from the accounts and the resulting gain or loss is reflected in the
consolidated statements of income.
DEFERRED CHARGES -- Deferred charges include real estate brokers' fees,
architectural and design fees, specifically attributable to the family center
facility which are capitalized and amortized on a straight line basis over the
base period of the related center facility lease. For Fiscal Years 1997 and
1996, accumulated amortization was approximately $570,000 and $397,000,
respectively.
INTANGIBLE ASSETS -- Goodwill and Other Intangible Assets consist of goodwill,
and various contract rights and non-compete agreements.
The excess of the aggregate purchase price over the fair value of assets of
businesses acquired (goodwill) is being amortized on a straight-line basis over
the estimated period benefited, not exceeding twenty-five years.
Other intangible assets are amortized over the estimated period of benefit,
utilizing an accelerated or straight-line method, as applicable.
Subsequent to an acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining useful life
of its intangible assets may warrant revision or that the remaining balance of
such assets may not be recoverable. When factors indicate that such assets
should be evaluated for possible impairment, the Company uses an estimate of the
acquired operations undiscounted cash flows over the remaining life of the asset
in measuring whether the asset is recoverable.
DEFERRED REVENUE -- Deferred revenue results from prepaid tuitions,
employer-sponsor advances and cash received on uncompleted consulting or
development projects.
OTHER CURRENT AND LONG-TERM LIABILITIES -- Other current and long-term
liabilities consist primarily of deposits held pursuant to certain family center
management contracts. The deposits will be remitted to the clients upon
termination of the respective contracts. Amounts also consist of parent
deposits.
INCOME TAXES -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
REVENUE RECOGNITION -- Revenue is recognized as services are performed. In both
the corporate-sponsored model and the management contract model, revenues
consist primarily of tuition paid by parents, supplemented in some cases by
tuition payments from corporate sponsors and, to a lesser extent, by payments
from government agencies. Revenues also include management fees paid by
corporate sponsors. In the management contract model, in addition to tuition and
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<PAGE> 12
management fee revenues, revenue is also recognized for reimbursable expenses
paid either in lieu of or to supplement tuitions.
The Company maintains contracts with its corporate sponsors to manage and
operate their family centers under various terms. The Company's contracts are
generally three to ten years in length with varying renewal options. Management
expects to renew the Company's existing contracts for periods consistent with
the remaining renewal options allowed by the contracts or other reasonable
extensions.
STOCK-BASED COMPENSATION -- Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", ("APB Opinion No. 25"), and related Interpretations. Under
APB Opinion No. 25, no compensation cost related to employee stock options has
been recognized because all options are granted with exercise prices equal to or
greater than the fair market value at the date of grant.
EARNINGS PER SHARE -- In Fiscal 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
("SFAS 128"). Under the standards established by SFAS 128, earnings per share is
measured at two levels: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares after considering the additional dilution related to preferred
stock, options and warrants.
NEW PRONOUNCEMENTS -- In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure", ("SFAS 129"). SFAS 129 establishes
standards for disclosing information about an entity's capital structure. The
Company adopted SFAS 129 in the fourth quarter of 1997. The adoption of SFAS 129
did not have a material impact on the Company's financial position, results of
operations or cash flows.
In 1998 the Company will adopt the provisions of two Statements of Financial
Accounting Standards ("SFAS") recently issued by the Financial Accounting
Standards Board. SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130")
establishes standards for displaying comprehensive income and its components in
a full set of financial statements. SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" establishes standards for reporting
information about operating segments in annual financial statements and requires
reporting selected information about operating segments in interim financial
reports issued to stockholders. SFAS 130 and 131 only affect financial statement
disclosures in interim and annual reports; therefore, the adoption of these
accounting standards will not have an impact on the Company's financial
condition or results of operation.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires
the costs of start-up activities and organization costs, as defined, to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
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<PAGE> 13
December 15, 1998. Management does not expect the adoption to have a material
impact on the Company's results of operations, financial condition or cash
flows.
RECLASSIFICATIONS -- Certain reclassifications have been made in the 1996 and
1995 consolidated financial statements to conform to the 1997 presentation.
2. ACQUISITIONS
Effective July 1, 1997, BRHZ acquired the business and substantially all the
assets and liabilities of Pacific Preschools, Inc. d.b.a. The Learning Garden
for approximately $1,600,000 in cash and 108,333 shares of BRHZ Common Stock in
a transaction which was accounted for as a purchase. The operating results of
the acquired company have been included from the date of acquisition. The
purchase price was allocated based on the estimated fair value of the assets and
liabilities acquired at the date of acquisition. Goodwill amounting to
approximately $2,700,000 resulted from the transaction and is being amortized
over a period of 25 years.
Effective December 1, 1995, BRHZ acquired the business and some of the assets
and liabilities of GreenTree Child Care Services, Inc. ("GreenTree"), a child
care management company, for approximately $6,000,000, including a $3,000,000
note payable in a transaction which was accounted for as a purchase. The
operating results of the acquired company have been included from the date of
acquisition. The purchase price was allocated based on the estimated fair value
of the assets and liabilities acquired at the date of acquisition. Approximately
$3,000,000 in goodwill and intangible assets were recorded as a result of the
transaction. Goodwill was reduced by approximately $1,200,000 and $740,000 in
Fiscal Years 1996 and 1997, respectively, due to the benefit of acquired
deferred tax assets, and is being amortized over 25 years. BRHZ also issued a
common stock purchase warrant for 66,666 shares of BRHZ's Common Stock at an
exercise price of $10.50 per share, which was forfeited by The Service Master
Company L.P. in December 1997.
Effective October 2, 1995, CFAM acquired 100% of the outstanding stock of
Resources for Child Care Management, Inc. ("RCCM") for approximately $3,400,000
and 324,995 shares of CFAM Common Stock in a transaction which was accounted for
as a purchase. The operating results of the acquired company have been included
from the date of acquisition. The principal stockholder of RCCM also entered
into an employment agreement and an agreement not to compete with the Company
(see Note 12). The purchase price has been allocated based on the estimated fair
value of the assets and liabilities acquired at the date of acquisition.
Goodwill amounting to approximately $5,800,000 resulted from the transaction and
is being amortized over a period of 18 years.
3. FIXED ASSETS
Property and equipment consists of the following:
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<PAGE> 14
<TABLE>
<CAPTION>
Depreciable lives
(years) Fiscal 1997 Fiscal 1996
----------------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment 3 - 15 $ 11,069,000 $ 8,554,000
Buildings 20 - 40 10,537,000 4,318,000
Leasehold improvements 3 / life of lease 4,345,000 2,407,000
Land -- 1,887,000 876,000
------------ ------------
27,838,000 16,155,000
Less accumulated depreciation (6,606,000) (4,635,000)
------------ ------------
Property and equipment, net $ 21,232,000 $ 11,520,000
============ ============
</TABLE>
Fixed assets in Fiscal 1997 and Fiscal 1996 include automobiles and office
equipment of $358,000 and $228,000, respectively, held under capital leases.
Amortization expense relating to fixed assets under capital leases was
approximately $37,000 and $26,000 for Fiscal 1997 and Fiscal 1996, respectively.
Accumulated amortization relating to fixed assets under capital leases totaled
approximately $224,000 and $165,000 for Fiscal 1997 and Fiscal 1996,
respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1997 1996
----------- -----------
<S> <C> <C>
Goodwill, net of amortization of $1,961,000 and $1,397,000, respectively $ 9,834,000 $ 7,936,000
Contract rights, net of amortization of $2,669,000 and $1,818,000,
respectively 946,000 1,782,000
Other, net of amortization of $95,000 and $92,000, respectively
500,000 3,000
----------- -----------
Total $11,280,000 $ 9,721,000
=========== ===========
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1997 1996
----------- -----------
<S> <C> <C>
Accounts Payable $ 651,000 $ 1,179,000
Accrued payroll and employee benefits 8,887,000 6,887,000
Accrued expenses 5,109,000 2,483,000
----------- -----------
$14,647,000 $10,549,000
=========== ===========
</TABLE>
6. LINE OF CREDIT
In December 1997 BRHZ increased its unsecured line of credit with a bank which
bears interest at either the bank's prime rate or LIBOR plus a spread based on
funded debt levels, to $10,000,000. An unused fee of .125% per annum, adjusted
for certain increases in debt borrowings, per annum is payable quarterly. The
credit line expires on October 31, 1999. The agreement requires the Company to
comply with certain covenants, which include among other things, the maintenance
of specified financial ratios. The Company has drawn $480,000 from this facility
in order to purchase real estate, which has been subsequently secured by a
mortgage. This amount represents a reduction in the amount of funds
14
<PAGE> 15
available to be drawn upon, and has been included in long term debt on the
accompanying consolidated balance sheet. See Note 7.
CFAM has entered into a $5,000,000 revolving credit facility with a bank to be
used for working capital and other general corporate purposes. Borrowings under
the credit facility, which is subject to renewal on an annual basis, will bear
interest at the lender's prime rate and are secured by a deed of trust on
certain real estate, a security interest in the Company's accounts receivable,
and certain furniture and equipment. No amounts have been advanced under the
facility as of January 2, 1998.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1997 1996
----------- -----------
<S> <C> <C>
Mortgage payable to a bank with monthly payments of interest only at either (i)
the bank's prime rate, or (ii) LIBOR plus a spread based on the Company's funded
debt levels; principal payment due October 2003; secured by real estate $ 480,000 $ --
Notes payable to a state agency with monthly payments of approximately $2,300
including interest of 5%, with final payments due December 2001 and April 2007;
secured by related furniture, fixtures and equipment 112,000 --
Unsecured notes payable to a bank with monthly payments of approximately $1,200
plus accrued interest at the bank's prime rate plus 1% (9.5% at December 31,
1997) with a final payment due October 1999 and March 2000 29,000 --
Bank term loan, bearing interest at 9.75%, repaid in Fiscal Year 1997 -- 3,033,000
Promissory notes to banks, bearing interest at rates ranging from 8% to 9.875%,
repaid in Fiscal Year 1997 -- 4,313,000
Notes payable to stockholder, bearing interest at 10%, repaid in Fiscal Year 1997 -- 70,000
Mortgage payable to banks including interest at varying rates, repaid in Fiscal
Year 1997 -- 1,624,000
Note payable - three semiannual installments including interest of 8%, repaid
in Fiscal Year 1996 -- 42,000
Obligations under capital leases at rates of 8% to 10.24%, secured by
automobiles and certain office equipment; due in 2001
162,000 66,000
----------- -----------
Total 783,000 9,148,000
Less current maturities (80,000) (1,396,000)
----------- -----------
Long-term debt $ 703,000 $ 7,752,000
=========== ===========
</TABLE>
15
<PAGE> 16
8. INCOME TAXES
Income tax expense (benefit) consisted of the following for Fiscal Years 1997,
1996 and 1995 (Note 1):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense $ 2,276,000 $ 353,000 $ 96,000
Deferred tax expense (770,000) (1,734,000) (368,000)
Reduction in valuation allowance -- (1,925,000) (570,000)
Benefit of acquired deferred tax assets applied to
reduce goodwill 737,000 1,142,000 --
----------- ----------- ---------
Income tax expense (benefit), net $ 2,243,000 $(2,164,000) $(842,000)
=========== =========== =========
</TABLE>
A reconciliation of the U.S. Federal statutory rate to the effective rate is as
follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
U. S. Federal statutory rate $ 1,701,000 $ 643,000 $ 452,000
Benefit of acquired deferred tax assets applied to
reduce goodwill 737,000 1,142,000 --
Change in valuation allowance (416,000) (4,455,000) (1,570,000)
Return to provision adjustments impacting deferred
tax assets (420,000) -- --
State taxes on income 293,000 295,000 96,000
Permanent differences and other 348,000 211,000 180,000
----------- ----------- ---------
Income tax expense (benefit), net $ 2,243,000 $(2,164,000) $(842,000)
=========== =========== =========
</TABLE>
Deferred tax assets are as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1997 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 784,000 $2,174,000
Reserve on assets 234,000 116,000
Liabilities not yet deductible 2,361,000 1,841,000
Deferred Revenue 1,353,000 411,000
Amortization 800,000 750,000
Other 389,000 284,000
----------- ----------
5,921,000 5,576,000
Deferred tax asset valuation allowance -- (416,000)
----------- ----------
$ 5,921,000 $5,160,000
=========== ==========
</TABLE>
At December 31, 1997 the Company has federal net operating loss carryforwards of
approximately $1.7 million which are subject to annual limitations and are
available to offset certain future taxable earnings and expire at various dates
through 2007. Management believes the Company will generate sufficient future
taxable income to realize deferred tax assets prior to the expiration of any net
operating loss carryforwards and that realization of the net deferred tax asset
is more likely than not.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
Pursuant to the Merger Agreement and the Registration Statement on Form S-4
(Registration No. 333-57035) dated June 17, 1998, the Company completed a merger
by and among BRHZ and CFAM, respectively. The Merger was approved by a separate
vote of the stockholders of BRHZ and CFAM on July
16
<PAGE> 17
24, 1998, and is to be treated as a tax free reorganization and to be accounted
for as a pooling of interests. In the merger, each share of BRHZ Common Stock,
was exchanged for 1.15022 shares of the Company's $.01 par value per share
Common Stock, and each share of CFAM Common Stock was exchanged for one share of
Common Stock. All historical amounts in the accompanying financial statements
have been restated to reflect the respective exchange ratio.
BRHZ PUBLIC OFFERING
Pursuant to the Registration Statement on Form S-1, as amended (Registration No.
333-14981) dated November 6, 1997, BRHZ completed an initial public offering of
3,415,500 shares of BRHZ Common Stock, of which 1,350,000 shares of BRHZ Common
Stock were issued and sold by BRHZ and 2,065,500 of which were sold by selling
stockholders, at an offering price of $13.00 per share. BRHZ received proceeds
of approximately $15.6 million (after deducting underwriting discounts and other
expenses). Approximately $4.0 million was used to repay outstanding
indebtedness.
In connection with the initial public offering, BRHZ effected a .33 for 1
reverse stock split. Accordingly, all references in the accompanying financial
statements to common share or per common share information have been restated to
reflect the reverse stock split.
In connection with the offering, all outstanding shares of BRHZ's Series A,
Series B and Series C Mandatorily Redeemable Convertible Preferred Stock
(collectively, the "BRHZ Convertible Preferred Stock") were converted into an
aggregate of 3,100,512 shares of BRHZ Common Stock, and outstanding warrants,
which otherwise would have expired upon the closing of the offering, were
converted into 303,924 shares of BRHZ Common Stock. The BRHZ Convertible
Preferred Stock was initially recorded at fair value. From the date of issuance
to the date of the mandatory redemption for BRHZ Common Stock, $9.1 million in
accretion and dividends were recorded as charges to retained earnings and as
increases to the carrying value of preferred stock. Upon the redemption of these
securities for BRHZ Common Stock, the carrying value of the BRHZ Convertible
Preferred Stock was recorded as a credit to common stock and paid-in capital.
Redeemable common stock issued in connection with an acquisition was also
converted to BRHZ Common Stock in connection with the BRHZ initial public
offering.
CFAM PUBLIC OFFERING
Pursuant to the Registration Statement on Form S-1, as amended (Registration No.
333-29523) which was declared effective August 12, 1997, CFAM completed an
initial public offering of 2,702,500 shares of CFAM Common Stock, of which
1,401,386 shares were issued and sold by CFAM, at a public offering price of
$10.00 per share (the "CFAM Offering"). CFAM received net proceeds of
approximately $12.1 million (after deducting underwriting discounts and
expenses). Approximately $3.7 million was used to repay all of the Company's
then outstanding bank borrowings.
In connection with the CFAM Offering, CFAM effected a .65 for 1 reverse stock
split. Accordingly, all references in the accompanying consolidated financial
statements to common share or per common share information have been restated to
reflect the reverse stock split. As a result of the CFAM Offering, all 1,125,000
shares of CFAM's issued and outstanding Series A preferred stock were converted
into 1,169,935 shares of CFAM Common Stock.
17
<PAGE> 18
The Company intends to use the balance of the net proceeds from both the
offerings for working capital and general corporate purposes, including the
merger and integration of the operations of BRHZ and CFAM, and financing of
potential acquisitions and new centers currently under development.
OTHER CHARGES IN THE STATEMENT OF INCOME
Concurrent with the CFAM Offering, CFAM removed the restrictions, set forth in
the restricted stock agreement, on 32,500 shares of common stock held by an
officer of CFAM. As a result, CFAM recorded a non-recurring, non-cash stock
compensation charge of $297,000, or $0.03 per share, assuming dilution, (for
which CFAM received no tax deduction) in the quarter ended September 30, 1997.
In the quarter ended June 30, 1997, BRHZ incurred costs of $543,000 associated
with a public offering of securities. Because the offering was delayed, the
amounts incurred were treated as a period cost.
STOCK OPTIONS
BRHZ and CFAM had established incentive compensation plans under which they were
authorized to grant both incentive stock option and non-qualified stock options
to employees and directors. As of December 31, 1997 there were approximately
520,000 Shares of BRHZ Common Stock and 450,000 shares of CFAM Common Stock
eligible for grant under these plans.
The options expire at the earlier of ten years from date of grant or three
months after termination of the holder's employment with the Company unless
otherwise determined by the Compensation Committee of the Board of Directors. In
accordance with the Merger Agreement the Company will assume all obligations for
outstanding options to purchase shares of BRHZ and CFAM. The following table
summarizes information about stock options outstanding at December 31, 1997
adjusted by the abovementioned conversion ratios (Note 1):
<TABLE>
<CAPTION>
Weighted Weighted
Number Weighted Average Average Number Average
Range of Exercise Outstanding at Remaining Exercise Exercisable at Exercise
Price 12/31/97 Contractual Life Price 12/31/97 Price
- ----------------- -------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ .39 27,030 .75 $ .39 27,030 $ .39
$ .52 - $ .65 209,952 4.66 $ .64 184,323 $ .64
$1.96 - $ 3.26 113,484 7.16 $ 2.70 43,774 $ 2.63
$4.62 - $ 6.52 302,627 4.73 $ 5.46 243,323 $ 5.25
$6.83 - $ 7.69 913,975 8.04 $ 7.61 490,500 $ 7.56
$7.82 - $16.63 586,774 9.25 $ 8.66 -- --
--------- ---- ------ ------- ------
2,153,842 7.44 $ 6.56 988,950 $ 5.29
</TABLE>
Upon completion of the Merger, all previously outstanding options to purchase
CFAM Common Stock granted by CFAM were subject to accelerated vesting and became
immediately exercisable. In addition, options to purchase BRHZ Common Stock
granted to certain BRHZ executives were subject to accelerated vesting and
became immediately exercisable upon completion of the Merger (See Note 1). All
remaining outstanding options to purchase BRHZ Common Stock were converted into
options to purchase shares of the Company's Common Stock under the terms and
conditions under which they were granted, adjusted for the abovementioned
exchange ratios.
18
<PAGE> 19
The Company accounts for options issued to employees and directors under APB
Opinion No. 25. All options have been granted with exercise prices equal to or
greater than the fair value of the Company's Common Stock on the date of grant.
As a result, no compensation cost has been recognized.
SFAS 123 established new financial accounting and reporting standards for
stock-based compensation plans. The Company has adopted the disclosure-only
provision of SFAS 123. As a result, no compensation cost has been recognized for
the Company's stock option plans. Had compensation cost for the stock option
plans been determined based on the fair value at the grant date for awards in
Fiscal Years 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts for the 1997 and 1996 fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1997 1996
----------- -----------
<S> <C> <C>
Net income available to common stockholders:
As reported $ 1,844,000 $ 2,930,000
Pro forma $ 734,000 $ 2,419,000
Earnings per share - Basic:
As reported $ 0.43 $ 1.16
Pro forma $ 0.17 $ 0.96
Earnings per common share assuming dilution:
Net income:
As reported $ 2,761,000 $ 2,959,000
Pro forma $ 1,651,000 $ 2,448,000
Earnings per share - Diluted:
As reported $ 0.30 $ 0.66
Pro forma $ 0.14 $ 0.54
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option on its date of grant has been estimated for
pro-forma purposes using the Black-Scholes option pricing model using the
following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1997 1996
----------- -----------
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 35.0% 0.0%
Risk free interest rate 5.60% - 6.42% 5.60% - 6.76%
Expected life of options 5 - 7.5 years 7 - 10 years
Weighted-average fair value per share $ 3.94 $ 3.18
of options granted during the year
</TABLE>
A summary of the status of the Company's option plans, including options issued
to members of the Board of Directors, is as follows for the 1997, 1996 and 1995
fiscal years:
19
<PAGE> 20
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996 Fiscal Year 1995
---------------- ---------------- ----------------
Weighted Average Weighted Average Weighted Average
---------------- ---------------- ----------------
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 1,675,300 $5.16 1,160,790 $4.07 882,819 $3.25
Granted 729,946 8.46 566,109 7.15 325,671 5.70
Exercised (183,377) 2.01 (34,254) 3.12 (2,037) 0.52
Canceled (68,027) 5.02 (68,739) 4.33 (45,663) 4.43
---------- ----- ---------- ------ ------- -----
Outstanding at end of
period 2,153,842 $6.56 1,623,906 $5.09 1,160,790 $4.07
Exercisable 988,950 780,860 671,934
</TABLE>
The weighted average contractual life remaining on options outstanding under the
above plans at December 31, 1997 is 7.3 years.
In addition to the above plans, CFAM issued 32,500 options to purchase CFAM
Common Stock during 1996 to its vice-chairman in exchange for consulting
services. The options have an exercise price of $7.69 per share and expire in
2005. At the grant date, 13,000 of the options vested and the remainder vests
ratably over a three year period. The options were valued under the provisions
of SFAS 123 and appropriate compensation expense was recorded. During 1995, CFAM
also issued 325,000 options to purchase CFAM Common Stock to an employee and
former stockholder of RCCM. The options were granted at an exercise price of
$7.69 per share and vest ratably over a five year period. In connection with the
Merger all options vested immediately and will remain in effect until their
expiration ten years after date of issuance. The Company determined the
intrinsic value of the options was not material.
STOCK PURCHASE WARRANTS
In connection with the issuance in fiscal 1991 of BRHZ's Series C Redeemable
Convertible Preferred Stock and the issuance of convertible debt, which was
subsequently retired, to certain stockholders, the Company issued warrants for
the purchase of 305,045 shares of BRHZ common stock. The warrants were
exercisable at $.60 per share and were exercised concurrent with the BRHZ
initial public offering in November 1997. No value was ascribed to the warrants
upon issuance as such value was considered immaterial. All warrants previously
issued were outstanding at Fiscal Years 1996 and 1995 respectively.
In connection with the acquisition of GreenTree, BRHZ issued a common stock
purchase warrant for 66,666 shares of BRHZ Common Stock at an exercise price of
$10.50 per share, which were to expire on November 30, 1998. The common stock
warrant was forfeited by The ServiceMaster Company L.P. in December 1997.
Prior to 1994, CFAM issued stock purchase warrants for the purchase of 78,000
shares of CFAM Common Stock to a stockholder. Warrants for the purchase of CFAM
Common Stock outstanding at January 2, 1998 and December 27, 1996, totaled
26,000 and 52,000, respectively, and have exercise prices ranging from $5.77 to
$7.69 per share. The warrants for the purchase of CFAM Common Stock were all
exercised in January 1998.
10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
All outstanding shares of BRHZ's Series A, Series B, and Series C Mandatorily
Redeemable Preferred Stock were redeemed in conjunction with the BRHZ initial
20
<PAGE> 21
public offering. The shares converted into 1.67 shares of BRHZ Common Stock for
each share of BRHZ Mandatoruly Redeemable Preferred Stock.
All outstanding shares of CFAM preferred stock were redeemed in conjunction with
the CFAM initial public offering. The CFAM preferred shares converted into
1,169,935 shares of CFAM Common Stock.
The Company recorded charges of $843,000, $1,127,000 and $1,127,000 to
accumulated deficit for Fiscal Years 1997, 1996 and 1995, respectively, to
reflect the accretion of preferred stock dividends.
11. EARNINGS PER SHARE
The Company has adopted the provisions of SFAS 128. Under the standards
established by SFAS 128, earnings per share is measured at two levels: basic
earnings per share and diluted earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by dividing
net income by the weighted average number of common shares after considering the
additional dilution related to preferred stock, options and warrants. All
periods presented have been restated to reflect the adoption of SFAS 128.
The following tables present information necessary to calculate earnings per
share for Fiscal Years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Fiscal Year 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share:
Income Available to common stockholders $1,844,000 4,333,000 $ .43
=====
Effect of dilutive securities
Option and warrants -- 1,118,000
Convertible preferred stock 917,000 3,842,000
---------- ---------
Diluted earnings per share: $2,761,000 9,293,000 $ .30
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share:
Income Available to common stockholders $2,930,000 2,522,000 $1.16
=====
Effect of dilutive securities
Option and warrants -- 810,000
Convertible preferred stock 29,000 1,170,000
---------- ---------
Diluted earnings per share: $2,959,000 4,502,000 $ .66
========== ========= =====
</TABLE>
The above earnings per share on a diluted basis has been prepared in accordance
with SFAS 128 based on the historical results and weighted average shares of
each company, adjusted for the effect on weighted average shares for the merger
exchange ratio. The diluted earnings per share in Fiscal Year 1996 is affected
by the fact that the preferred stock of BRHZ was anti-dilutive in Fiscal Year
1996 on a standalone basis.
21
<PAGE> 22
<TABLE>
<CAPTION>
Fiscal Year 1995
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic earnings per share:
Income Available to common stockholders $1,047,000 2,227,000 $ .47
=====
Effect of dilutive securities
Option and warrants -- 701,000
Convertible preferred stock 1,127,000 4,737,000
---------- ---------
Diluted earnings per share: $2,174,000 7,665,000 $ .28
========== ========= =====
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various equipment, automobiles, office space and family
center facilities under non-cancelable operating leases. Many of the leases
contain renewal options for various periods. Certain leases contain provisions
which include additional payments based upon revenue performance, enrollment or
the level of the Consumer Price Index at a future date. Rent expense was
approximately $5,643,000, $4,398,000 and $3,299,000 in Fiscal Years 1997, 1996
and 1995, respectively. Future minimum payments under non-cancelable operating
leases are as follows:
<TABLE>
<S> <C>
Year Ending
1998 $ 5,357,000
1999 5,326,000
2000 4,731,000
2001 4,135,000
2002 3,262,000
Thereafter 15,378,000
------------
$ 38,189,000
============
</TABLE>
Future minimum lease payments include approximately $920,000 of lease
commitments, which are guaranteed by third parties pursuant to operating
agreements for family centers.
EMPLOYMENT AND NONCOMPETE AGREEMENTS
Subsequent to its acquisition of RCCM, the Company entered into an employment
agreement with a former stockholder of RCCM. The agreement contains certain
severance benefits including salary continuation until August 27, 1998, if the
employee is terminated without cause prior to that date. The same individual
also entered into an agreement not to compete with the Company. This agreement
provides for the payment of an aggregate of $500,000, payable in equal yearly
installments of $100,000, in exchange for the individual's commitment not to
compete with the Company for a period of five years from the date of his
termination. Subsequent to December 31, 1997, in connection with the Merger the
Company's and the employee's obligations under the employment agreement and the
agreement not to compete were terminated in consideration of a cash payment
from the Company to the employee.
OTHER
The Company is a defendant in certain legal matters in the ordinary course of
business. Management believes the resolution of such legal matters will not have
a material effect on the Company's financial condition or results of operations.
22
<PAGE> 23
The Company's family centers are subject to numerous federal, state and local
regulations and licensing requirements. Failure of a center to comply with
applicable regulations can subject it to governmental sanctions which could
require expenditures by the Company to bring its family centers into compliance.
13. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Retirement Savings Plan (the "Plan") for all
employees with more than 1,000 hours of credited service annually and who have
been with the Company one or more years. The Plan is funded by elective employee
contributions of up to 15% of their compensation. Both BRHZ and CFAM maintain
individual plans ("BRHZ Plan" and "CFAM Plan", respectively). Under the BRHZ
Plan the Company matches 25% of employee contributions for each participant up
to 8% of the employee's compensation. Under the CFAM Plan the Company matches
25% of employee contributions for each participant up to 6% of the employee's
compensation. Expense under the Plan, consisting of Company contributions and
Plan administrative expenses paid by the Company, was $571,000, $261,000 and
$124,000 in Fiscal Years 1997, 1996 and 1995, respectively.
During 1997, CFAM adopted an employee stock purchase plan (the "CFAM Stock
Purchase Plan"). The Stock Purchase Plan allows eligible employees the right to
purchase common stock on a semi-annual basis at the lower of 85% of the market
price at the beginning or end of each six-month offering period. At January 2,
1998, no shares had been issued under the CFAM Stock Purchase Plan and there
were 100,000 shares of unissued common stock reserved for issuance under the
CFAM Stock Purchase Plan.
14. RELATED PARTY TRANSACTIONS
During 1995, CFAM maintained a verbal consulting agreement with a member of the
CFAM Board of Directors for development and marketing services. The agreement
was terminated in December 1995 in connection with the individual's resignation
from the CFAM Board of Directors. Fees paid under this agreement totaled $61,000
in 1995.
The Company purchases food for use in several Company managed family centers
from an affiliate of a stockholder, Marriott Management Services Corp. Total
food purchases from such affiliate during 1997, 1996 and 1995 were approximately
$532,000, $417,000, and $420,000, respectively.
The Company has agreements with the employers of two members of its Board of
Directors and an affiliate of a stockholder, Marriott Management Services Corp.,
to operate and manage a family center. In return for its services under these
agreements, the Company received management fees of $181,000, $108,000, and
$66,000, respectively, for fiscal 1997, 1996 and 1995. Additionally, the Company
provided consulting services for such employers in 1997 and 1996 and received
consulting fees of $68,000 and $65,000, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
23
<PAGE> 24
CASH, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The carrying amounts approximate fair value which is estimated based on the
current rates offered to the company for debt of the same remaining maturities.
16. STATEMENT OF CASH FLOW INFORMATION
The following table presents supplemental disclosure of cash flow information
for fiscal years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash payments of interest $ 655,000 $ 538,000 $ 215,000
Cash payments of income taxes 1,363,000 157,000 70,000
Noncash financing activities:
Issuance of options in exchange for
consulting services -- 100,000 --
Restriction removed on common stock 297,000 -- --
Issuance of restricted common shares -- 28,000 --
Accretion of preferred stock and
redeemable common stock 917,000 1,127,000 1,127,000
</TABLE>
BRHZ acquired certain family centers by entering into mortgages of approximately
$978,000 in the period ended June 30, 1996.
During the periods ending December 31, 1997 and June 30, 1996 and 1995, BRHZ
entered into capital lease obligations of $62,000, $27,000 and $47,000,
respectively, in connection with lease agreements for automobiles and office
equipment.
In conjunction with the purchase of childcare management companies (as
discussed in Note 2), liabilities were assumed as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
Fair value of assets acquired $ 3,992,000 $ 8,578,000 $ 11,719,000
Issuance of common stock (569,000) -- (1,750,000)
Cash paid (1,972,000) (3,067,000) (4,123,000)
------------ ----------- -------------
Liabilities assumed $ 1,451,000 $ 5,511,000 $ 5,846,000
</TABLE>
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the Fiscal Years 1997 and 1996 are summarized
as follows:
24
<PAGE> 25
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Fiscal Year 1997:
Revenue $39,336 $42,136 $43,923 $47,160
Operating income 1,574 982 839 1,653
Income before taxes 1,420 880 810 1,894
Net income 802 485 345 1,129
Net income available to
common stockholders 521 203 (9) 1,129
Basic earnings per share $ 0.20 $ 0.08 $ 0.00 $ 0.13
Diluted earnings per share $ 0.10 $ 0.05 $ 0.00 $ 0.10
Fiscal Year 1996:
Revenue $26,367 $29,876 $34,255 $36,609
Operating income 537 644 424 825
Income before taxes 420 569 299 605
Net income 843 1,153 150 1,911
Net income available to common stockholders 561 872 (132) 1,629
Basic earnings per share $ 0.22 $ 0.35 ($ 0.05) $ 0.64
Diluted earnings per share $ 0.10 $ 0.14 ($ 0.05) $ 0.42
</TABLE>
25
<PAGE> 26
SCHEDULE
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions Deductions- Balance at end
beginning of charged to Charge offs of period
period costs and
expenses
<S> <C> <C> <C> <C>
Fiscal Year 1997 $ 448,000 $ 291,000 $ 160,000 $ 579,000
Fiscal Year 1996 $ 196,000 $ 332,000 $ 97,000 $ 431,000
Fiscal Year 1995 $ 123,000 $ 249,000 $ 176,000 $ 196,000
</TABLE>
26
<PAGE> 27
(b) Pro Forma Financial Information
The pro forma financial information is incorporated by reference from
the "Bright Horizons Family Solutions Unaudited Pro Forma Combined Financial
Information" contained in the Registration Statement on Form S-4 (File No.
333-57035) declared effective on June 19, 1998.
(c) Exhibits. See Exhibit Index.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BRIGHT HORIZONS FAMILY
SOLUTIONS, INC.
Date: October 7, 1998 By: /s/ Michael E. Hogrefe
-----------------------------------
Michael E. Hogrefe
Chief Financial Officer
<PAGE> 29
EXHIBIT INDEX
2.1 Amended and Restated Agreement and Plan of Merger dated as of June 17,
1998, ("Merger Agreement") by and among Bright Horizons Family
Solutions, Inc., CorporateFamily Solutions, Inc., Bright Horizons,
Inc., CFAM Acquisition, Inc., and BRHZ Acquisition, Inc. (Incorporated
by Reference to Exhibit 2.1 of the Registration Statement on Form S-4
filed on June 17, 1998 (Registration No. 333-57035)).
4.1 Article IV of Bright Horizons Family Solutions, Inc.'s Certificate of
Incorporation (Incorporated by Reference to Exhibit 3.1 of the
Registration Statement on Form S-4 filed on June 17, 1998 (Registration
No. 333-57035)).
4.2 Article IV of Bright Horizons Family Solutions, Inc.'s Bylaws
(Incorporated by Reference to Exhibit 3.2 of the Registration Statement
on Form S-4 filed on June 17, 1998 (Registration No. 333-57035)).
4.3 Specimen Common Stock Certificate (Incorporated by Reference to
Exhibit 4.3 of the Form 8-K filed on July 28, 1998).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for Fiscal Year Ended 1997 (For SEC use only)
27.2 Financial Data Schedule for Fiscal Year Ended 1996 (For SEC use only)
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated October 6, 1998 included in this Form 8-K, into Bright
Horizons Family Solutions, Inc.'s previously filed Registration Statement on
Form S-8 (File No. 333-60023).
/s/ Arthur Andersen LLP
Nashville, Tennessee
October 6, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 dated July 28, 1998 of Bright Horizons Family Solutions,
Inc. of our report on the financial statements of Bright Horizons, Inc. as of
June 30, 1996 and for each of the two years in the period ended June 30, 1996,
dated August 1, 1996, except for the stock split which is as of October 8,
1997, and the adoption of SFAS 128 which is as of May 14, 1998 appearing in
this Form 8-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
October 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE CONSOLIDATED FINANCIAL STATEMENTS OF BRIGHT HORIZONS FAMILY SOLUTIONS AS OF
AND FOR FISCAL YEAR 1997 AND FISCAL YEAR 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,384,000
<SECURITIES> 0
<RECEIVABLES> 9,582,000
<ALLOWANCES> 579,000
<INVENTORY> 0
<CURRENT-ASSETS> 39,856,000
<PP&E> 27,838,000
<DEPRECIATION> 6,606,000
<TOTAL-ASSETS> 76,842,000
<CURRENT-LIABILITIES> 21,851,000
<BONDS> 0
0
0
<COMMON> 108,000
<OTHER-SE> 46,555,000
<TOTAL-LIABILITY-AND-EQUITY> 76,842,000
<SALES> 0
<TOTAL-REVENUES> 172,555,000
<CGS> 0
<TOTAL-COSTS> 149,312,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 581,000
<INCOME-PRETAX> 0
<INCOME-TAX> 2,243,000
<INCOME-CONTINUING> 2,761,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,761,000
<EPS-PRIMARY> .43
<EPS-DILUTED> .30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE CONSOLIDATED FINANCIAL STATEMENTS OF BRIGHT HORIZONS FAMILY SOLUTIONS AS OF
AND FOR FISCAL YEAR 1997 AND FISCAL YEAR 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,497,000
<SECURITIES> 0
<RECEIVABLES> 9,204,000
<ALLOWANCES> 431,000
<INVENTORY> 0
<CURRENT-ASSETS> 20,783,000
<PP&E> 16,155,000
<DEPRECIATION> 4,635,000
<TOTAL-ASSETS> 44,816,000
<CURRENT-LIABILITIES> 16,646,000
<BONDS> 0
23,087
0
<COMMON> 24,000
<OTHER-SE> (8,744,000)
<TOTAL-LIABILITY-AND-EQUITY> 44,816,000
<SALES> 0
<TOTAL-REVENUES> 127,107,000
<CGS> 0
<TOTAL-COSTS> 111,351,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 754,000
<INCOME-PRETAX> 0
<INCOME-TAX> (2,164,000)
<INCOME-CONTINUING> 4,057,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,057,000
<EPS-PRIMARY> 1.16
<EPS-DILUTED> .66
</TABLE>
