<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1998.
Commission File Number 0-24699
---------
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1742957
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
209 Tenth Avenue South, Suite 300
Nashville, TN 37203
and
One Kendall Square, Building 200
Cambridge, Massachusetts 02139
(Address of principal executive offices)
(615) 256-9915
(617) 577-8020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: 11,364,420 shares of common
stock, $.01 par value, at November 9, 1998.
<PAGE> 2
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
A. Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 (Unaudited) 3
B. Consolidated Statements of Operations for the Three and
Nine Months ended September 30, 1998 and September 30,
1997 (Unaudited) 4
C. Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1998
and 1997 (Unaudited) 5
D. Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
<PAGE> 3
Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,102 $ 25,384
Restricted cash -- 176
Accounts receivable, net 9,449 9,003
Prepaid expenses and other current assets 3,828 2,605
Current deferred tax asset 4,804 2,688
-------- --------
Total current assets 43,183 39,856
Fixed assets, net 28,476 21,232
Deferred charges, net 519 692
Goodwill and other intangibles, net 12,466 11,280
Noncurrent deferred tax asset 3,045 3,233
Other assets 665 549
-------- --------
Total assets $ 88,354 $ 76,842
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt and
obligations under capital leases $ 79 $ 80
Accounts payable and accrued expenses 22,793 14,647
Deferred revenue, current portion 7,380 4,612
Amounts held in escrow -- 176
Income taxes payable -- 962
Other current liabilities 819 1,374
-------- --------
Total current liabilities 31,071 21,851
Long term debt and obligations due under
capital leases 642 703
Accrued rent 1,584 1,519
Other long term liabilities 2,825 2,771
Deferred revenue, net of current portion 3,186 3,335
-------- --------
39,308 30,179
-------- --------
Stockholders' equity:
Common Stock $.01 par value, 30,000,000 shares
authorized, 11,317,000 shares issued and
outstanding at September 30, 1998 and
10,854,000 shares issued and outstanding
at December 31, 1997, respectively 113 108
Additional paid in capital 64,887 60,544
Accumulated deficit (15,954) (13,989)
-------- --------
Common stockholders' equity 49,046 46,663
-------- --------
Total liabilities and stockholders' equity $ 88,354 $ 76,842
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
<PAGE> 4
Bright Horizons Family Solutions, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $ 53,161 $ 43,923 $ 154,336 $ 125,395
Cost of services 46,272 38,376 133,275 108,425
-------- -------- --------- ---------
Gross profit 6,889 5,547 21,061 16,970
Selling, general and administrative 4,742 4,196 14,094 11,914
Amortization 172 215 706 821
Other charges (Note 3) 7,500 297 7,500 840
-------- -------- --------- ---------
Income (loss) from operations (5,525) 839 (1,239) 3,395
Net interest income (expense) 317 (29) 935 (285)
-------- -------- --------- ---------
Income (loss) before tax (5,208) 810 (304) 3,110
Income tax provision (benefit) (1,159) 465 853 1,478
-------- -------- --------- ---------
Net income (loss) before preferred
stock dividends and accretion on
redeemable common stock (4,049) 345 (1,157) 1,632
Preferred stock dividends and accretion
on redeemable common stock -- 354 -- 917
-------- -------- --------- ---------
Net income (loss) available to common stockholders $ (4,049) $ (9) $ (1,157) $ 715
======== ======== ========= =========
Earnings (loss) per share - basic $ (0.36) $ (0.00) $ (0.10) $ 0.24
======== ======== ========= =========
Weighted average shares - basic 11,207 3,838 11,099 2,985
======== ======== ========= =========
Earnings (loss) per share - diluted $ (0.36) $ (0.00) $ (0.10) $ 0.15
======== ======== ========= =========
Weighted average shares - diluted 11,207 4,310 11,099 4,973
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
<PAGE> 5
Bright Horizons Family Solutions, Inc
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30, September 30,
1998 1997
<S> <C> <C>
Net income (loss) before preferred stock dividends and
accretion on redeemable common stock $ (1,157) $ 1,632
Adjustments to reconcile net income (loss) before
preferred stock dividends and accretion on
redeemable common stock to net cash
provided by operating activities:
Depreciation and amortization 2,840 2,138
Loss on disposal of fixed assets -- 39
Decrease in goodwill from utilization of tax benefit -- 737
Non-cash expenses -- 297
Deferred income taxes (1,928) (324)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade (418) (1,673)
Prepaid expenses and other current assets 279 (399)
Accounts payable and accrued expenses 8,438 2,766
Income taxes payable (962) 119
Deferred revenue 2,619 1,788
Accrued rent 65 (52)
Other current and long-term liabilities (677) 918
-------- --------
Total Adjustments 10,256 6,354
-------- --------
Net cash provided by operating activities 9,099 7,986
-------- --------
Cash flows from investing activities:
Additions to fixed assets, net of acquired amounts (9,695) (6,679)
Proceeds from disposal of fixed assets 51 323
(Increase) decrease in deferred charges 172 (105)
(Increase) decrease in other assets (127) 88
Payments for acquisitions (1,422) (1,539)
-------- --------
Net cash used in investing activities (11,021) (7,912)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (1,133) --
Proceeds from issuance of common stock 2,972 12,256
Principal payments of long term debt and
obligations under capital leases (199) (5,640)
Borrowing of long term debt and capital leases -- 724
-------- --------
Net cash provided by financing activities 1,640 7,340
-------- --------
Net increase (decrease) in cash and cash equivalents (282) 7,414
Cash and cash equivalents, beginning of period 25,384 8,060
-------- --------
Cash and cash equivalents, end of period $ 25,102 $ 15,474
======== ========
Supplemental cash flow information:
Cash payments for interest $ 42 $ 563
======== ========
Cash payments for income taxes $ 1,028 $ 3,501
======== ========
Non-cash financing activities:
Options issued in connection with acquisition $ 375 $ --
Tax benefit related to stock option exercises 1,326 --
-------- --------
$ 1,701 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
<PAGE> 6
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
ITEM 1.D. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The Company and Basis of Presentation
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 a cost-plus arrangement, typically for a single
employer. The Company receives tuition revenue from parents and management fees
from corporate sponsors for its childcare services.
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 separate vote of the stockholders of each
of BRHZ and CFAM on July 24, 1998, and has been treated as a tax free
reorganization 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. 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.
The Company reports operating results on a calendar year basis. BRHZ had a
fiscal year ending June 30, and CFAM had a fiscal year ending on the Friday
closest to December 31. The accompanying financial statements include nine month
operating results for BRHZ for the periods ended September 30, 1998 and 1997,
and nine month operating results for CFAM for the periods ended October 2, 1998
and September 26, 1997.
<PAGE> 7
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
The accompanying financial statements have been prepared by the Company in
accordance with the accounting policies described in the Company's audited
financial statements, 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, included in the Company's Current Report on Form 8-K/A dated
October 7, 1998 (No. 000-24699), and should be read in conjunction with the
notes thereto.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments which are necessary to
present fairly its financial position as of September 30, 1998 and the results
of its operations and cash flows for the three month and nine month periods
ended September 30, 1998 and 1997, and are of a normal and recurring nature. The
results of operations for interim periods are not necessarily indicative of the
operating results to be expected for the full year.
NEW PRONOUNCEMENTS -- In the January 1998 the Company adopted the provisions of
Statements of Financial Accounting Standards ("SFAS"). No. 130 "Reporting
Comprehensive Income" ("SFAS 130") which establishes standards for displaying
comprehensive income and its components in a full set of financial statements.
In December 1998 the company will adopt SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which 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 shareholders. SFAS 130 and 131 only
affect financial statement disclosures in interim and annual reports; therefore,
the adoption of these accounting standards has no 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
December 15, 1998. Management does not expect the adoption to have a material
impact on the Company's results of operation, financial condition or cash flow.
2. Acquisition
Effective September 8, 1998, the Company acquired 100% of the outstanding stock
of Creative Movement Center, Inc. ("CMAC") for approximately $900,000 cash, the
assumption of net liabilities of approximately $250,000, contingent payments of
$275,000 payable upon the achievement of certain operating targets, and options
to purchase 30,120 shares of the Company's common stock which were valued under
<PAGE> 8
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
the provisions of FAS 123. The transaction has been accounted for as a purchase,
and the operating results of CMAC have been included from the date of
acquisition. The purchase price has been allocated based on the estimated fair
value of the assets and liabilities acquired at the date of acquisition.
Goodwill amounting to approximately $1.8 million resulted from the transaction
and is being amortized over a period of 18 years.
3. Other Charges
In the quarter ended September 30, 1998, the Company recorded merger and other
non-recurring costs totaling $7.5 million ($5.4 million after tax). The major
components of the charge are transaction fees and direct expenses associated
with the Merger, the impairment of certain intangible assets that are not
realizable as a result of the integration of the two companies following the
Merger, severance costs resulting from the Merger and non-recurring costs and
liabilities arising from the consolidation and integration of the two
predecessor organizations and the elimination of certain redundancies. The table
below (in thousands) presents the total provision associated with each component
of the charge as well as the remaining accrued liability for each component as
of September 30, 1998. The accrued liability associated with the charge has been
included in accrued expenses on the accompanying consolidated balance sheet.
<TABLE>
<CAPTION>
Accrued
liability as of
September 30,
Provision 1998
<S> <C> <C>
Merger costs $2,800 $ 200
Asset impairment charges 1,300 100
Severance costs 700 500
Integration costs 2,700 2,000
------ ------
Total $7,500 $2,800
====== ======
</TABLE>
In the quarter ended September 30, 1997, concurrent with the CFAM initial public
offering, restrictions on 32,500 shares of CFAM common stock held by an officer
of CFAM were removed. As a result, a non-recurring, non-cash compensation charge
of $297,000 was recorded (for which no tax deduction was received).
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.
<PAGE> 9
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
4. Earnings (Loss) Per Share
The computation of net income (loss) per share is based on the weighted average
number of common shares and common equivalent shares outstanding during the
period. Common equivalent shares include stock options, warrants and preferred
stock, and are determined using the modified treasury stock method.
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
("SFAS 128"), has been issued effective for fiscal periods ending after December
15, 1997. SFAS 128 established standards for computing and presenting earnings
per share.
The following tables present information necessary to calculate earnings
per share for the three and nine month periods:
<TABLE>
<CAPTION>
Three months Ended September 30, 1998
------------------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic earnings (loss) per share:
Loss available to common stockholders $ (4,049,000) 11,207,000 $(0.36)
======
Effect of dilutive securities:
Options and warrants -- --
------------ ---------- -----
Diluted earnings (loss) per share $ (4,049,000) 11,207,000 $(0.36)
============ ========== ======
</TABLE>
The above earnings per share on a diluted basis has been prepared in accordance
with SFAS 128. The conversion of stock options was not assumed as the effect
would have been anti-dilutive.
<TABLE>
<CAPTION>
Three months Ended September 30, 1997
------------------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic earnings (loss) per share:
Loss available to common stockholders $ (9,000) 3,838,000 $(0.00)
======
Effect of dilutive securities:
Options and warrants -- . 472,000
------------ ---------- -----
Diluted earnings (loss) per share $ (9,000) 4,310,000 $(0.00)
============ ========== ======
</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 for the three months ended
September 30,1997 was affected by the fact that the preferred stock and options
of BRHZ were anti-dilutive for the three month period on a standalone basis. In
addition,
<PAGE> 10
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
the diluted earnings per share was also affected by the fact that the preferred
stock of CFAM was anti-dilutive on a standalone basis for the three month
period.
<TABLE>
<CAPTION>
Nine months Ended September 30, 1998
-----------------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic earnings (loss) per share:
Loss available to common stockholders $ (1,157,000) 11,099,000 $(0.10)
======
Effect of dilutive securities:
Options and warrants -- --
------------ ---------- ------
Diluted earnings (loss) per share $ (1,517,000) 11,099,000 $(0.10)
============ ========== ======
</TABLE>
The above earnings per share on a diluted basis has been prepared in accordance
with SFAS 128. The conversion of stock options was not assumed as the effect
would have been anti-dilutive.
<TABLE>
<CAPTION>
Nine months Ended September 30, 1997
-----------------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic earnings per share:
Income available to common stockholders $ 715,000 2,985,000 $ 0.24
======
Effect of dilutive securities:
Options and warrants -- . 991,000
Convertible Preferred Stock 20,000 997,000
------------ ---------- ------
Diluted earnings per share $ 735,000 4,973,000 $ 0.15
============ ========== ======
</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 for the nine months ended
September 30,1997 was affected by the fact that the preferred stock of BRHZ was
anti-dilutive for the nine month period on a standalone basis.
<PAGE> 11
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors that future
financial and operating results may differ materially from those projected in
forward-looking statements made by, or on be half of, the Company. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance, or achievements of
the Company to be materially different form any future results, performance, or
achievements expressed or implied by such forward-looking statements. See "Risk
Factors" included in the Registration Statement on Form S-4 dated June 17, 1998
(Registration No. 33-57035) for a description of a number of risks and
uncertainties which could affect actual results.
RECENT DEVELOPMENTS
On April 26, 1998, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") and, in accordance with its terms, as subsequently amended
on June 17, 1998, Bright Horizons, Inc. ("BRHZ") and CorporateFamily Solutions,
Inc. ("CFAM") formed Bright Horizons Family Solutions, Inc. a Delaware
corporation (the "Company"). Each issued and outstanding share of BRHZ common
stock was converted into 1.15022 shares of the Company's common stock ("Common
Stock") and each issued and outstanding share of CFAM common stock converted
into one share of Common Stock. Each outstanding option of BRHZ and CFAM was
converted into an option to purchase shares of Common Stock at the same
conversion ratios referenced above. The merger ("Merger") was completed on July
24, 1998. The transaction has been accounted for as a pooling of interests and
tax-free reorganization.
All historical equity amounts have been restated to reflect the respective
exchange ratios, and certain reclassifications made for consistent presentation,
which had no effect on net income.
General
The Company provides workplace services for employers and families, including
childcare, early education and strategic worklife consulting, operating 269
child development centers at September 30, 1998. The Company has the capacity to
serve more than 33,000 children in 35 states and the District of Columbia and
has partnerships with many of the nation's leading employers, including 69
Fortune 500 companies. Working Mother's 1998 list of the "100 Best Companies for
Working Mothers" includes 44 clients of the Company. Historical revenue growth
has primarily resulted from the addition of new child development centers as
well as increased
<PAGE> 12
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
enrollment at existing centers. The Company reports its operating results on a
calendar year basis.
The Company's business is subject to seasonal and quarterly fluctuations. Demand
for child development services has historically decreased during the summer
months. During this season, families are often on vacation or have alternative
child care arrangements. Demand for the Company's services generally increases
in September upon the beginning of the new school year and remains relatively
stable throughout the rest of the year. Results of operations may also 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, the length of time required for new centers to achieve
profitability, center closings, refurbishment or relocation, the sponsorship
model mix of new and existing centers, the timing and level of sponsorship
payments, competitive factors and general economic conditions.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage of
revenue for the periods ending September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 87.0 87.4 86.4 86.5
------ ------ ------ ------
Gross profit 13.0 12.6 13.6 13.5
Selling, general & administrative
8.9 9.5 9.1 9.5
Amortization 0.4 0.5 0.5 0.7
Other charges 14.1 0.7 4.8 0.6
------ ------ ------ ------
Income (loss) from operations (10.4) 1.9 (0.8) 2.7
Net interest income (expense) 0.6 (0.1) 0.6 (0.2)
------ ------ ------ ------
Income (loss) before income taxes (9.8) 1.8 (0.2) 2.5
Income tax provision (benefit) (2.2) 1.0 0.5 1.2
------ ------ ------ ------
Net income (loss) (7.6)% 0.8% (0.7)% 1.3%
====== ====== ====== ======
</TABLE>
<PAGE> 13
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
Three and Nine Months Ended September 30, 1998 Compared to the Three and Nine
Months Ended September 30, 1997
Revenue. Revenue increased $9.2 million, or 21.0%, to $53.2 million for the
three months ended September 30, 1998 from $43.9 million for the three months
ended September 30, 1997. Revenue increased $28.9 million, or 23.1%, to $154.3
million for the nine months ended September 30, 1998 from $125.4 million for the
nine months ended September 30, 1997. The growth in revenue is primarily
attributable to the net addition of 35 family centers since September 30, 1997,
modest growth in the existing base of family centers and tuition increases at
existing centers of approximately 3% to 4%.
Gross Profit. Cost of services consists of center operating expenses, including
payroll and benefits for center personnel, facilities costs including
depreciation, supplies and other expenses incurred at the center level. Gross
profit increased $1.3 million, or 24.2%, to $6.9 million for the three months
ended September 30, 1998 from $5.5 million for the three months ended September
30, 1997. As a percentage of revenue, gross profit increased to 13.0% for the
three months ended September 30, 1998 compared to 12.6% for the same period in
1997. Gross profit increased $4.1 million, or 24.1%, to $21.1 million for the
nine months ended September 30, 1998 from $17.0 million for the nine months
ended September 30, 1997. As a percentage of net revenues gross profit was 13.6%
for the nine months ended September 30, 1998, compared to 13.5% for the nine
months ended September 30, 1997.
The Company showed a modest increase in gross profit margins for the three and
nine month periods in 1998 compared to the three and nine month periods of 1997
as a result of a greater proportion of centers achieving mature operating
levels, as well as strong enrollment in newer family centers, partially offset
by higher depreciation associated with renovations at a number of older centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of regional and district management personnel,
corporate management and administrative functions, and development expenses for
new and existing centers. Selling, general and administrative expenses increased
$546,000, or 13.0%, to $4.7 million for the three months ended September 30,
1998 from $4.2 million for the three months ended September 30, 1997. Selling,
general and administrative expenses increased $2.2 million, or 18.3%, to $14.1
million for the nine months ended September 30, 1998 from $11.9 million for the
nine months ended September 30, 1997. As a percentage of revenue, selling,
general and administrative expenses decreased to 8.9% and 9.1%, respectively,
for the three and nine months ended September 30, 1998 from 9.5% and 9.5%,
respectively, for the same 1997 periods.
The decrease in selling, general and administrative expenses as a percentage of
revenue during the first nine months of this year is primarily attributable to a
larger revenue base and increased efficiencies. The dollar increase is primarily
attributable to investments in regional management, sales personnel, information
systems and communications personnel necessary to support long term growth.
<PAGE> 14
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
Other Charges. In the quarter ended September 30, 1998, other charges of $7.5
million represent non-recurring costs and charges related to the consummation of
the Merger and the integration of the operations of BRHZ and CFAM following the
Merger. See note 3 to the Company's Consolidated Financial Statements. For the
three months ended September 30, 1997, other charges reflected a non-cash
compensation charge related to the lifting of restrictions on common stock held
by an officer of the Company. Other charges in the nine months ended September
30, 1997 also includes costs associated with a public offering of securities of
BRHZ that was delayed, and as such was treated as a period cost.
Income (Loss) from Operations. The loss from operations totaled $(5.5) million
for the three months ended September 30, 1998, as compared with income from
operations of $839,000 for the three months ended September 30, 1997. Excluding
the other charges (described above) incurred in the third quarters of 1998 and
1997 of $7.5 million and $297,000 (respectively), operating income for the three
months ended September 30, 1998 would have totaled $2.0 million, an increase of
$839,000 or 73.9% from $1.1 million in the same 1997 period. The loss from
operations totaled $(1.2) million for the nine months ended September 30, 1998
as compared with income from operations of $3.4 million for the comparable
period in 1997, as a result of the factors set forth above. Excluding other
charges of $7.5 million and $840,000 for the nine months ended September 30,
1998 and 1997,respectively, income from operations would have increased $2.0
million, or 47.8%, to $6.3 million, for the nine months ended September 30, 1998
from $4.2 million for the nine months ended September 30, 1997.
Net Interest Income (Expense). Net interest income of $317,000 for the three
months ended September 30, 1998 increased $346,000 from $29,000 of net interest
expense for the three months ended September 30, 1997. Net interest income of
$935,000 for the nine months ended September 30 1998 increased $1.2 million from
$285,000 of net interest expense for the nine months ended September 30, 1997.
The increase in interest income and decrease in interest expense is attributable
to the investment of the proceeds received from the initial public offerings of
the Company's subsidiaries (which closed in August 1997 and November 1997 for
CFAM and BRHZ, respectively) and the repayment of approximately $8.0 million of
debt with the proceeds from the respective stock offerings.
Income Tax Provision (Benefit). Due to the non-deductibility of certain
transaction costs associated with the Merger, the Company had an effective tax
benefit rate of 22% for the quarter ended September 30, 1998. For the nine
months ended September 30, 1998, the tax provision was $853,000 on a net loss of
$304,000, due to the non-deductible other charges indicated above. Excluding the
effects of these non-deductible expenses, the effective tax rate would have been
41% for the three and nine month periods ended September 30, 1998. The effective
tax rate for the three and nine month periods ended September 30,1997 was
approximately 57% and 48%, respectively. Excluding the non-deductible charges,
the effective tax rate would have been 42% and 43%, for the three and nine month
periods ended September 30, 1997, respectively.
<PAGE> 15
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
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 proceeds from
the initial public offerings and cash flow from operations. The Company had
working capital of $12.1 million and $18.0 million as of September 30, 1998 and
December 31, 1997, respectively.
Cash provided from operations increased to $9.1 million for the nine months
ended September 30, 1998, from $8.0 million for the nine months ended September
30, 1997. This increase was principally the result of higher levels of revenue
and gross margins, as well as the increase in accrued expenses incurred during
such period, but not yet paid. The $2.6 million increase in deferred revenue was
associated with (i) fees paid in advance during the nine months ended September
30, 1998 for long term priority enrollment rights in certain centers and (ii)
for parent tuition paid in advance. Such advances increased $1.8 in the same
period of fiscal 1997.
Cash used in investing activities increased to $11.0 million for the nine months
ended September 30, 1998 from $7.9 million for the nine months ended September
30, 1997, principally due to $9.7 million of fixed asset additions and leasehold
improvements, as compared to $6.7 million for the nine months ended September
30, 1997. Of the $9.7 million, approximately $5.0 million of fixed asset
additions relate to new family centers, of the remainder, approximately $3.5
million relates to the refurbishment and expansion of existing family centers,
with the balance being used principally for office expansion and investment in
information technology in corporate, regional and district offices. Management
expects to maintain the current level of center related fixed asset spending
through the remainder of 1998.
Cash provided by financing activities decreased to $1.6 million for the nine
months ended September 30, 1998, from $7.3 million for the nine months ended
September 30, 1997. During the nine months ended September 30, 1998, the Company
received $3.0 million in net proceeds from the issuance of Common Stock
associated with the exercise of stock options. These proceeds were partially
offset by the repurchase of shares of the Company's Common Stock which were
subsequently reissued to fulfill warrant and stock option exercises. During the
nine months ended September 30, 1997 CFAM completed an initial public offering,
which along with proceeds from other issuances of stock, raised $12.3 million.
The Company repaid $5.6 million of debt and capital lease obligations, while
incurring additional obligations of $724,000 for the nine months ended September
30, 1997.
Management believes that funds provided by operations and the Company's cash and
cash equivalent balances will be adequate to meet planned operating and capital
expenditure needs for at least the next 18 months. However, if the Company were
to make any significant acquisitions or make significant investments in the
purchase of facilities for new or existing centers for corporate sponsors, it
may be necessary for the Company to obtain additional debt or equity financing.
There can be no assurance that the Company would be able to obtain such
financing on reasonable terms, if at all.
<PAGE> 16
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
YEAR 2000 CONVERSION
Management does not anticipate that the consequences of the year 2000 will have
a material adverse impact on the Company's operations, cash flows or financial
condition. Nor does the Company believe the total cost of compliance or the
potential failure of third parties' systems will have a material adverse impact
on the Company's operations, cash flows or financial condition.
The Company has and will continue to coordinate the identification, evaluation,
and implementation of changes to computer systems and applications necessary to
achieve a year 2000 date conversion with no effect on customers or disruption to
business operations. These actions are necessary to ensure that the systems and
applications will recognize and process the year 2000 and beyond. The Company is
also evaluating non-system issues relative to the year 2000 and beyond. As
appropriate, the Company is communicating with suppliers, customers, financial
institutions and others with which it does business to coordinate year 2000
conversion.
As part of planned software replacement, the Company is currently in the process
of bringing its systems into compliance with the ability to process the year
2000. These planned replacements are currently underway, and are expected to be
completed by August of 1999. As of September 30, 1998 the Company has estimated
that projects currently underway will allow the Company's systems to operate
properly in the year 2000 and plans to test the systems in 1999.
<PAGE> 17
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE> 18
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings: None
ITEM 2. Changes in Securities: None
ITEM 3. Defaults Upon Senior Securities: None
ITEM 4. Submission of Matters to a Vote of Security Holders: None
ITEM 5. Other information: None
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 10 First Amendment to the Bright Horizons Family
Solutions, Inc. 1998 Stock Incentive Plan.
Exhibit 27 (for SEC use only)
(b) Reports on Form 8-K. The Company and its predecessors pursuant to
Rule 12g-3(c) of the Securities Exchange Act of 1934, as amended,
made the following filings:
(1) The Company filed a Current Report on Form 8-K on July 28,
1998, relating to the consummation of the merger on July 24,
1998 by and among Bright Horizons Family Solutions, Inc.,
Bright Horizons, Inc., BRHZ Acquisition, Inc.,
CorporateFamily Solutions, Inc., and CFAM Acquisition, Inc.
(2) The Company filed a Current Report on Form 8-K on August 14,
1998 reporting the operating results of the Company for the
month ended July 31, 1998.
(3) The Company filed a Current Report on Form 8-K on September
24, 1998 reporting the operating results of the Company for
the month ended August 31, 1998.
(4) The Company filed an amendment to the Current Report of Form
8-K (originally filed on July 28, 1998) on October 7, 1998
to include pro-forma financial statements for fiscal years
1997, 1996 and 1995.
<PAGE> 19
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
SIGNATURE
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, thereunto duly authorized:
Date: November 13, 1998
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
By: /s/ Michael E. Hogrefe
------------------------------------------
Michael E. Hogrefe
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
<PAGE> 20
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
EXHIBIT INDEX
10 First Amendment to the Bright Horizons Family Solutions, Inc. 1998
Stock Incentive Plan.
27 Financial Data Schedule (for Commission use only)
<PAGE> 1
FIRST AMENDMENT TO
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
1998 STOCK INCENTIVE PLAN
This First Amendment (this "Amendment") to the 1998 Stock Incentive
Plan (the "Plan") is hereby established by Bright Horizons Family Solutions,
Inc., a Delaware corporation (the "Company"), and adopted by its Board of
Directors as of the 18th day of September, 1998 (the "Effective Date").
RECITALS
A. The Board of Directors of the Company (the "Board") previously
approved, and the shareholders of the Company previously approved and adopted,
the Plan.
B. The Board has deemed that it is in the best interests of the Company
to amend the Plan.
AMENDMENT
A. Section 8(c) of the Plan is hereby amended by replacing the first
sentence of such section with the following sentence, "Each Outside Director
Option shall vest and become exercisable with respect to one-third of such
shares on the first anniversary of the date of grant, with respect to one-third
on the second anniversary of the date of grant, and with respect to one-third on
the third anniversary of the date of grant".
B. Section 9(b)(ii) of the Plan is hereby amended by replacing the
phrase "a majority" on the third line with "40%".
C. Section 13 of the Plan is hereby amended by deleting the phrase
"provided that it must be approved by a majority of the votes cast by the
holders of the Company's common stock".
Date approved by the Board: September 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BRIGHT HORIZONS FAMILY SOLUTIONS, INC. FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 25,102
<SECURITIES> 0
<RECEIVABLES> 10,254
<ALLOWANCES> 805
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<CURRENT-ASSETS> 43,183
<PP&E> 37,208
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<COMMON> 113
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