Bright Horizons Family Solutions, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005.
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 0-24699
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction of incorporation or organization)
|
|
62-1742957
(IRS Employer Identification No.) |
200 Talcott Avenue South, Watertown, Massachusetts 02472
(Address of principal executive offices)
(617) 673-8000
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act): Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 27,432,504 shares of common stock, $.01 par value, at November 1,
2005.
FORM 10-Q
TABLE
OF CONTENTS
2
Bright Horizons Family Solutions, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
30,344 |
|
|
$ |
42,472 |
|
Accounts receivable, net |
|
|
29,132 |
|
|
|
26,182 |
|
Prepaid expenses and other current assets |
|
|
13,794 |
|
|
|
11,204 |
|
Prepaid income taxes |
|
|
2,246 |
|
|
|
1,764 |
|
Current deferred tax asset |
|
|
14,750 |
|
|
|
12,986 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
90,266 |
|
|
|
94,608 |
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
119,446 |
|
|
|
112,637 |
|
Goodwill, net |
|
|
120,387 |
|
|
|
72,987 |
|
Other intangibles, net |
|
|
26,079 |
|
|
|
12,747 |
|
Non-current deferred tax asset |
|
|
2,515 |
|
|
|
2,837 |
|
Other assets |
|
|
2,074 |
|
|
|
789 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
360,767 |
|
|
$ |
296,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and
obligations due under capital leases |
|
$ |
664 |
|
|
$ |
778 |
|
Accounts payable and accrued expenses |
|
|
58,531 |
|
|
|
51,956 |
|
Deferred revenue, current portion |
|
|
45,004 |
|
|
|
26,494 |
|
Income tax payable |
|
|
599 |
|
|
|
274 |
|
Other current liabilities |
|
|
5,753 |
|
|
|
3,287 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
110,551 |
|
|
|
82,789 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and obligations due under
capital leases, net of current portion |
|
|
850 |
|
|
|
1,321 |
|
Accrued rent |
|
|
7,166 |
|
|
|
4,902 |
|
Other long-term liabilities |
|
|
5,787 |
|
|
|
5,203 |
|
Non-current deferred tax liability |
|
|
2,193 |
|
|
|
__ |
|
Deferred revenue, net of current portion |
|
|
15,943 |
|
|
|
16,146 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
142,490 |
|
|
|
110,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock: 5,000,000 shares authorized, none issued or outstanding
Common stock: $.01 par value; 50,000,000 authorized; 27,410,000 and
26,870,000 shares issued and outstanding |
|
|
273 |
|
|
|
268 |
|
Additional paid-in capital |
|
|
111,686 |
|
|
|
101,584 |
|
Deferred compensation |
|
|
(1,466 |
) |
|
|
(1,085 |
) |
Cumulative translation adjustment |
|
|
3,923 |
|
|
|
8,474 |
|
Retained earnings |
|
|
103,861 |
|
|
|
77,003 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
218,277 |
|
|
|
186,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
360,767 |
|
|
$ |
296,605 |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements
3
Bright Horizons Family Solutions, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
154,425 |
|
|
$ |
138,954 |
|
|
$ |
462,200 |
|
|
$ |
407,101 |
|
Cost of services |
|
|
126,582 |
|
|
|
116,025 |
|
|
|
378,716 |
|
|
|
340,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
27,843 |
|
|
|
22,929 |
|
|
|
83,484 |
|
|
|
66,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
12,668 |
|
|
|
10,991 |
|
|
|
37,990 |
|
|
|
32,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
442 |
|
|
|
354 |
|
|
|
1,202 |
|
|
|
798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
14,733 |
|
|
|
11,584 |
|
|
|
44,292 |
|
|
|
33,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
592 |
|
|
|
122 |
|
|
|
1,276 |
|
|
|
299 |
|
Interest expense |
|
|
(36 |
) |
|
|
(50 |
) |
|
|
(123 |
) |
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
15,289 |
|
|
|
11,656 |
|
|
|
45,445 |
|
|
|
33,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
6,251 |
|
|
|
4,877 |
|
|
|
18,587 |
|
|
|
14,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,038 |
|
|
$ |
6,779 |
|
|
$ |
26,858 |
|
|
$ |
19,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
0.33 |
|
|
$ |
0.25 |
|
|
$ |
0.99 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
27,279 |
|
|
|
26,600 |
|
|
|
27,078 |
|
|
|
26,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
0.32 |
|
|
$ |
0.24 |
|
|
$ |
0.95 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
28,557 |
|
|
|
27,882 |
|
|
|
28,380 |
|
|
|
27,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
4
Bright Horizons Family Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,858 |
|
|
$ |
19,760 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10,377 |
|
|
|
9,106 |
|
Stock-based compensation expense |
|
|
743 |
|
|
|
675 |
|
Deferred income taxes |
|
|
(368 |
) |
|
|
(874 |
) |
Tax benefit realized from the exercise of stock options |
|
|
2,927 |
|
|
|
1,729 |
|
Loss on disposal of fixed assets |
|
|
18 |
|
|
|
48 |
|
Other |
|
|
(956 |
) |
|
|
(293 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,204 |
) |
|
|
(1,773 |
) |
Prepaid expenses and other current assets |
|
|
(1,525 |
) |
|
|
(3,093 |
) |
Accounts payable and accrued expenses |
|
|
6,880 |
|
|
|
3,380 |
|
Income taxes |
|
|
(116 |
) |
|
|
2,068 |
|
Deferred revenue |
|
|
9,570 |
|
|
|
1,077 |
|
Accrued rent |
|
|
376 |
|
|
|
49 |
|
Other assets |
|
|
386 |
|
|
|
(115 |
) |
Other current and long-term liabilities |
|
|
(4,119 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
48,847 |
|
|
|
31,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to fixed assets, net of acquired amounts |
|
|
(9,794 |
) |
|
|
(7,746 |
) |
Proceeds from the disposal of fixed assets |
|
|
|
|
|
|
46 |
|
Payments for acquisitions, net of cash acquired |
|
|
(56,292 |
) |
|
|
(19,246 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(66,086 |
) |
|
|
(26,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from the issuance of equity awards |
|
|
6,057 |
|
|
|
4,188 |
|
Principal payments of long term debt and
obligations due under capital leases |
|
|
(577 |
) |
|
|
(531 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
5,480 |
|
|
|
3,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash balances |
|
|
(369 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(12,128 |
) |
|
|
8,384 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
42,472 |
|
|
|
33,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
30,344 |
|
|
$ |
42,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash payments of interest |
|
|
115 |
|
|
|
124 |
|
Cash payments of income taxes |
|
|
16,482 |
|
|
|
11,184 |
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
5
ITEM
1.D. Unaudited Notes to Condensed Consolidated Financial Statements
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., and CorporateFamily Solutions, Inc.,
on July 24, 1998 (the Merger.) The Company provides workplace services for employers and
families including early care and education and strategic work/life consulting throughout the
United States, Canada, Ireland, the United Kingdom and Puerto Rico.
The Company operates its early care and education centers under various types of arrangements,
which generally can be classified in two forms: (i) the management (cost plus) model, where the
Company manages a work-site early care and education center under a cost-plus arrangement,
typically for a single employer and (ii) the profit and loss (P&L) model which can be either (a)
employer-sponsored, where the Company typically provides early care and educational services on a
priority enrollment basis for employees of a single employer sponsor or (b) a lease model, where
the Company may provide priority early care and education to the employees of multiple employers
located within a real estate developers property or the community at large.
Basis of Presentation The accompanying financial statements have been prepared by the Company in
accordance with the accounting policies described in the Companys audited financial statements
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, and
should be read in conjunction with the notes thereto. The condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
In the
opinion of the Companys management, the accompanying unaudited
condensed consolidated financial
statements contain all adjustments which are necessary for a fair statement of its financial
position as of September 30, 2005, and the results of its operations for the three and nine month
periods ended September 30, 2005 and 2004 and cash flows for the nine month periods ended September
30, 2005 and 2004, 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.
Stock Split On February 9, 2005, the Board of Directors approved a 2-for-1 stock split which was
paid on March 21, 2005 to stockholders of record as of March 4, 2005. All prior share and per
share amounts have been restated to reflect the stock split.
Segment Information As of September 30, 2005, the Company operates in one segment, providing
services to employers and families including early care and education and work/life consulting and
generates in excess of 90% of revenue and operating profit in the United States. Additionally, no
single customer accounts for more than 10% of the Companys revenue.
Stock-Based Compensation Statement of Financial Accounting Standards No. (SFAS) 123
Accounting for Stock-Based Compensation as amended by SFAS 148 Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of 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. (APB) 25,
Accounting for Stock Issued to Employees, and related interpretations.
The Company granted 54,700 and 46,000 shares of restricted common stock during the respective nine
month periods ended September 30, 2005 and 2004. These shares were accounted for under the
intrinsic value method as prescribed in APB 25. Stock-based compensation cost is
measured at the
6
grant date based on the fair value of the award and is recognized as expense over vesting periods
of three years. The 2005 and 2004 restricted stock grants were each valued at approximately $1.1
million, for which approximately $432,000 and $328,000 was recognized as compensation expense for
the nine month periods ended September 30, 2005 and 2004, respectively. The Company also recognized
approximately $311,000 and $347,000 in compensation expense during the nine month periods ended
September 30, 2005 and 2004, respectively, related to other existing equity awards for which
compensation expense must also be recognized. At September 30, 2005 the unrecognized amount of all
equity awards totaled $1.5 million and is recorded as deferred compensation.
Under APB 25, no compensation cost related to employee stock options has been
recognized as options are granted with exercise prices equal to or greater than the fair market
value at the date of grant. The Company accounts for options granted to non-employees using the
fair value method, in accordance with the provisions of SFAS 123, as amended by SFAS 148.
Had compensation cost for the stock option plans been determined based on the fair value at the
grant date for awards, consistent with the provisions of SFAS 123 and
SFAS 148, the Companys net income and earnings per share would have been reduced to the
following pro forma amounts for the three and nine-month periods ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended |
|
|
Nine Months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands except per share data) |
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
9,038 |
|
|
$ |
6,779 |
|
|
$ |
26,858 |
|
|
$ |
19,760 |
|
Add: Stock-based compensation
expense included in reported net
income, net of related tax
effects |
|
|
147 |
|
|
|
252 |
|
|
|
479 |
|
|
|
441 |
|
Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |
|
|
(413 |
) |
|
|
(804 |
) |
|
|
(3,561 |
) |
|
|
(2,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
8,772 |
|
|
$ |
6,227 |
|
|
$ |
23,776 |
|
|
$ |
18,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per shareBasic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.33 |
|
|
$ |
0.25 |
|
|
$ |
0.99 |
|
|
$ |
0.75 |
|
Pro forma |
|
$ |
0.32 |
|
|
$ |
0.23 |
|
|
$ |
0.88 |
|
|
$ |
0.68 |
|
Earnings
per shareDiluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.32 |
|
|
$ |
0.24 |
|
|
$ |
0.95 |
|
|
$ |
0.71 |
|
Pro forma |
|
$ |
0.31 |
|
|
$ |
0.22 |
|
|
$ |
0.84 |
|
|
$ |
0.65 |
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Expected dividend yield |
|
|
0.00 |
% |
|
|
___ |
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected stock price volatility |
|
|
44.7 |
% |
|
|
___ |
|
|
|
45.5 |
% |
|
|
46.8 |
% |
Risk free interest rate |
|
|
4.2 |
% |
|
|
___ |
|
|
|
3.4 |
% |
|
|
2.3 |
% |
Expected life of options |
|
6.3 years |
|
|
___ |
|
|
6.2 years |
|
6.3 years |
Weighted-average fair value
per share of options granted |
|
$ |
19.29 |
|
|
No grants |
|
$ |
16.78 |
|
|
$ |
17.44 |
|
7
Comprehensive Income Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources. The only components of comprehensive income reported by the Company are net income and
foreign currency translation adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended |
|
|
Nine Months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
9,038 |
|
|
$ |
6,779 |
|
|
$ |
26,858 |
|
|
$ |
19,760 |
|
Foreign currency translation adjustments |
|
|
(1,115 |
) |
|
|
181 |
|
|
|
(4,551 |
) |
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
7,923 |
|
|
$ |
6,960 |
|
|
$ |
22,307 |
|
|
$ |
20,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Issued Accounting Pronouncements In December 2004, the Financial Accounting
Standards Board (FASB) issued SFAS 123R
(revised 2004), Share-Based Payment. This statement requires companies to measure and recognize
the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value. SFAS 123R replaces SFAS 123, and
supersedes APB 25. In April 2005, the SEC postponed the
effective date of SFAS 123R until the fiscal year beginning
after June 15, 2005. Although the Company has not yet determined
whether the adoption of SFAS 123R
will result in amounts that are similar to the current pro forma
disclosures required under SFAS
123, the Company is evaluating the requirements under SFAS 123R and expects the adoption to have an
adverse impact on its consolidated statements of income and earnings per share.
In
June 2005, the FASB ratified Emerging Issues Task Force
consensus on Issue No. (EITF) 05-6,
Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or
Acquired in a Business Combination. EITF 05-6 provides guidance regarding the
amortization period for leasehold improvements acquired in a business combination and the
amortization period of leasehold improvements that are placed in service significantly after and
not contemplated at the beginning of the lease term. EITF 05-6 will be effective beginning with the
Companys second quarter of fiscal 2006. The Company is evaluating the expected impact
that the adoption of EITF 05-6 will have on its consolidated financial position, results of
operations and cash flows.
Reclassifications
Certain amounts in the prior years financial statements have been
reclassified to conform to the current years presentation.
2. Acquisitions
On September 12, 2005 the Company completed its acquisition of ChildrenFirst Inc.
(ChildrenFirst), a privately held operator of 33 employer-sponsored child care centers in the
U.S. and Canada. The cash consideration paid by Bright Horizons to the securityholders of
ChildrenFirst totaled $57.6 million, which was funded with cash on hand. Based on preliminary
estimates, the Company assumed liabilities of $19.5 million and
assets of $25.5 million, which
included cash of $11.1 million in connection with this acquisition. In addition, the Company
acquired the assets of a single site child care provider for approximately $1.0 million during the
quarter ended September 30, 2005. The Company will be conducting a formal review of the acquired
assets and liabilities and anticipates finalizing the purchase price allocations in the fourth
quarter of 2005.
Transactions completed in 2005 have resulted in allocations, including preliminary estimates for
the abovementioned acquisitions, to goodwill of $50.3 million and other intangible assets subject
to amortization, including customer relationships, trade names and non-competes of $15.2 million
which will be amortized over their determined useful lives. These preliminary estimates are based
on an allocation of the purchase price and the estimated fair value of the assets and liabilities
acquired at the date of acquisition.
The operating results of the acquired businesses have been included in the Companys consolidated
results of operations from the date of acquisition. The acquisitions are not material to the
Companys consolidated financial position or results of operation, and therefore no pro forma
information has been presented.
3. Earnings per Share
Earnings per share has been calculated in accordance with SFAS 128 Earnings per Share. The
8
computation of net earnings per share is based on the weighted average number of common shares and
common equivalent shares outstanding during the period. The following tables present information
necessary to calculate earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
|
(in thousands, except per share data) |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
9,038 |
|
|
|
27,279 |
|
|
$ |
0.33 |
|
|
$ |
6,779 |
|
|
|
26,600 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
restricted stock |
|
|
|
|
|
|
1,278 |
|
|
|
|
|
|
|
|
|
|
|
1,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
9,038 |
|
|
|
28,557 |
|
|
$ |
0.32 |
|
|
$ |
6,779 |
|
|
|
27,882 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
|
(in thousands, except per share data) |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
26,858 |
|
|
|
27,078 |
|
|
$ |
0.99 |
|
|
$ |
19,760 |
|
|
|
26,428 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
restricted stock |
|
|
|
|
|
|
1,302 |
|
|
|
|
|
|
|
|
|
|
|
1,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
26,858 |
|
|
|
28,380 |
|
|
$ |
0.95 |
|
|
$ |
19,760 |
|
|
|
27,758 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The common
stock equivalents excluded from the above diluted earnings per share
calculations for the three and nine month periods ended September 30, 2005 were approximately 9,000
and 43,000, respectively, and approximately 2,000 for both the three and nine month periods ended
September 30, 2004, as their inclusion would be anti-dilutive. For the three and nine month periods
ended September 30, 2005 and 2004, the Company had no warrants or preferred stock outstanding.
4. Commitments and Contingencies
The
Company has three letters of credit outstanding: one guaranteeing certain utility payments up to
$80,000; one guaranteeing certain rent payments up to $300,000; and
one guaranteeing certain premiums and deductible reimbursements up to $486,000.
No amounts have been drawn against any of these letters of credit. The Company also has a
revolving credit facility in the maximum principal amount of $60.0 million with an accordion
feature allowing an additional $40.0 million increase. No amounts have been drawn against this
line of credit.
The Company has severance agreements with five executives that provide for up to 24 months of
compensation upon the termination of employment following a change in control of the Company. The
maximum amount payable under these agreements at September 30, 2005 is approximately $3.8 million.
The severance agreements prohibit the above-mentioned employees from competing or divulging
confidential information for one to two years after their separation from the Company.
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 Companys
financial condition or results of operations.
9
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement About Forward Looking Information
The Company has made statements in this report that constitute forward-looking statements as that
term is defined in the federal securities laws. These forward-looking statements concern the
Companys operations, economic performance and financial condition and include statements
regarding: opportunities for growth; the number of early care and education centers expected to be
added in future years; the profitability of newly opened centers; capital expenditure levels; the
ability to incur additional indebtedness; strategic acquisitions, investments and other
transactions; changes in operating systems and policies and their intended results; our
expectations and goals for increasing center revenue and improving our operational efficiencies and
our projected operating cash flows. The forward-looking statements are subject to various known
and unknown risks, uncertainties and other factors. When words such as believes, expects,
anticipates, plans, estimates, projects or similar expressions are used in this report, the
Company is making forward-looking statements.
Although we believe that the forward-looking statements are based on reasonable assumptions,
expected results may not be achieved. Actual results may differ materially from the Companys
expectations. Among other risk factors that are discussed in our annual report on Form 10-K for
the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March
30, 2005, and, from time to time, in our other Securities and Exchange Commission reports and
filings, important factors that could cause actual results to differ from expectations include:
|
|
our inability to successfully execute our growth strategy; |
|
|
the effects of general economic conditions and world events; |
|
|
competitive conditions in the early care and education industry; |
|
|
loss of key client relationships or delays in new center openings; |
|
|
subsidy reductions by key existing clients; |
|
|
tuition price sensitivity; |
|
|
various factors affecting occupancy levels, including, but not limited to, the reduction in or changes to the general
labor force that would reduce the need for child care services; |
|
|
the availability of a qualified labor pool, the impact of labor organization efforts and the impact of government
regulations concerning labor and employment issues; |
|
|
federal and state regulations regarding changes in child care assistance programs, welfare reform, minimum wages and
licensing standards; |
|
|
the loss of government funding for child care assistance programs; |
|
|
the establishment of a governmentally mandated universal child care benefit; |
|
|
delays in identifying, executing or integrating key acquisitions; |
|
|
our inability to successfully defend against or counter negative publicity associated with claims involving alleged
incidents at our centers; |
|
|
our inability to maintain effective internal controls over financial reporting, or to have remediation efforts be
adequate to address identified deficiencies in internal controls over financial reporting; and |
|
|
our inability to obtain insurance at the same levels or at costs comparable to those incurred historically. |
We caution you that these risks may not be exhaustive. We operate in a continually
changing business environment and new risks emerge from time to time. You should not rely upon
forward-looking statements except as statements of our present intentions and of our present
expectations that may or may not occur. You should read these cautionary statements as being
applicable to all forward-looking statements wherever they appear. We assume no obligation to
update or revise the forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
10
Executive Summary and Discussion
Bright Horizons is a leading provider of workplace services for employers and families, including
early care and education and strategic work/life consulting. As of September 30, 2005, the Company
managed 616 early care and education centers, with more than 50 early care and education centers
under development. The Company has the capacity to serve approximately 66,300 children in 40
states, the District of Columbia, Canada, Ireland, the United Kingdom and Puerto Rico, and has
partnerships with many leading employers, including more than 90 Fortune 500 companies and more
than 65% of Working Mother Magazines 100 Best Companies for Working Mothers. The Companys 515
US centers average a capacity of 117 per location, while the 101
centers based in the United Kingdom, Ireland
and Canada average a capacity of 56 per location. At September 30, 2005, approximately 60% of the
Companys centers were profit and loss (P&L) models and 40% were management (cost plus) models.
The Company seeks to cluster centers in geographic areas to enhance operating efficiencies and to
create a leading market presence.
The Company operates centers for a diversified group of clients. At September 30, 2005, the
Companys early care and education centers were affiliated with the following industries:
|
|
|
|
|
Industry Classification |
|
Percentage of Centers |
Consumer |
|
|
5 |
% |
Financial Services |
|
|
15 |
% |
Government and Education |
|
|
15 |
% |
Healthcare/Pharmaceutical |
|
|
15 |
% |
Industrial/Manufacturing |
|
|
10 |
% |
Office Park Consortiums |
|
|
25 |
% |
Professional Services and Other |
|
|
5 |
% |
Technology |
|
|
10 |
% |
The Companys overall business strategy is centered on several key elements: identifying and
executing on growth opportunities; achieving sustainable operating margin improvement; maintaining
its competitive advantage as the employer of choice in its field and continuing the high quality of
its programs and customer satisfaction.
The Company achieved revenue, operating income and net income growth in the quarter and nine month
periods ended September 30, 2005 by executing on its growth strategy to add centers for new and
existing clients, to expand service offerings to clients, to pursue strategic acquisitions and to
assume the management of existing child care centers. The alignment of key demographic, social and
workplace trends combined with an overall under supply of quality childcare options for working
families has continued to fuel strong interest in the Companys services. General economic
conditions and the business climate in which individual clients operate remain the largest
variables in terms of future performance. These variables impact client capital and operating
spending budgets, industry specific sales leads and the overall sales cycle, as well as labor
markets and wage rates as competition for human capital fluctuates.
Specifically, the Company achieved revenue growth of 11.1% and 13.5% for the quarter and nine month
periods ended September 30, 2005, respectively, as compared to the same periods in 2004. The
Company added 69 centers during the nine month period ended September 30, 2005, including our first
center in Puerto Rico, the acquisition of thirty three employer-sponsored centers in the U.S. and
Canada and eleven centers in the Denver, Colorado metropolitan area. The Company closed 13 centers,
including the
combination of two into new, larger centers, during the nine month period ended September 30, 2005
and expects to close a total of 15-17 centers for the full year in 2005, consistent with historic
levels. A key element of the growth strategy is expanding relationships with existing clients, and
at September 30, 2005, the Company served a total of 48 multi-site clients at 231 locations.
11
Income from operations grew by $3.1 million and as a percentage of revenue improved from 8.3% for
the quarter ended September 30, 2004 to 9.5% in the third quarter of 2005. Income from operations
grew by $10.5 million and as a percentage of revenue improved from 8.3% for the nine month period
ended September 30, 2004 to 9.6% in the nine month period in 2005. In addition, net income grew by
$2.2 million and $7.1 million for the three and nine month periods ended September 30, 2005,
respectively, as compared to the corresponding periods in 2004. The improvement can be attributed
to pacing tuition increases slightly ahead of average wage increases, careful management of
personnel and overhead costs, contributions from the European operations, enrollment growth in
mature and ramping centers and the addition of mature centers through acquisitions and transitions
of management. Generally, the Company has been able to increase tuitions 4-5% annually on average,
which provides operating margin leverage relative to estimated wage increases of 3-4% annually on
average. The opportunity to achieve additional margin improvement in the future will be dependent
upon the Companys ability to achieve the following: continued incremental enrollment growth in our
mature and ramping classes of centers; annual tuition increases above the levels of annual average
wage increases; careful cost management; and the successful integration of acquisitions.
Finally, one of the Companys guiding principals is its focus on sustaining the high quality of its
services and programs and at the same time achieving revenue growth and increasing operating
profitability. The Companys future financial success will be dependent on meeting both of these
goals. Nearly 80% of the Companys eligible domestic early care and education centers are
accredited by the National Association for the Education of Young Children (NAEYC). The Company
also operates high quality programs to achieve the accreditation standards of the Office of
Standards in Education (OFSTED) and National Child Nursery Association (NCNA) care standards in
the United Kingdom and Ireland, respectively.
Seasonality The Companys business is subject to seasonal and quarterly fluctuations.
Demand for early care and education services has historically decreased during the summer months.
During this season, families are often on vacation or have alternative child care arrangements and
enrollment declines as older children transition to elementary schools. Demand for the Companys
services generally increases in September and October upon the beginning of the new school year and
remains relatively stable throughout the rest of the school year. Results of operations may also
fluctuate from quarter to quarter as a result of, among other things, the performance of existing
centers including enrollment and staffing fluctuations, the number and timing of new center
openings and/or acquisitions, the length of time required for new centers to achieve profitability,
center closings, refurbishment or relocation, the model mix (P&L vs. cost plus) of new and existing
centers, the timing and level of sponsorship payments, competitive factors and general economic
conditions.
Recent Developments On September 12, 2005 the Company completed its acquisition of
ChildrenFirst Inc. (ChildrenFirst), a privately held operator of 33 employer-sponsored child
care centers in the U.S. and Canada. The cash consideration paid by Bright Horizons to the
securityholders of ChildrenFirst totaled $57.6 million, which was funded with cash on hand. At the
time of acquisition ChildrenFirst was generating approximately $31.0 million in revenue annually.
In addition, during the quarter ended September 30, 2005 the Company acquired the assets of a
single site child care provider for approximately $1.0 million.
Results of Operations
The following table sets forth certain statement of operations data as a percentage of revenue for
the three and nine month periods ended September 30, 2005 and 2004:
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of services |
|
|
82.0 |
|
|
|
83.5 |
|
|
|
81.9 |
|
|
|
83.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18.0 |
|
|
|
16.5 |
|
|
|
18.1 |
|
|
|
16.4 |
|
Selling, general & administrative |
|
|
8.2 |
|
|
|
7.9 |
|
|
|
8.2 |
|
|
|
7.9 |
|
Amortization |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
9.5 |
|
|
|
8.3 |
|
|
|
9.6 |
|
|
|
8.3 |
|
Interest expense |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Interest income |
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9.9 |
|
|
|
8.4 |
|
|
|
9.8 |
|
|
|
8.3 |
|
Income tax provisions |
|
|
4.0 |
|
|
|
3.5 |
|
|
|
4.0 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
5.9 |
% |
|
|
4.9 |
% |
|
|
5.8 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended September 30, 2005 Compared to the Three and Nine Months Ended
September 30, 2004
Revenue. Revenue increased $15.4 million, or 11.1%, to $154.4 million for the three months ended
September 30, 2005 from $139.0 million for the same quarter in 2004. Revenue increased $55.1
million, or 13.5%, to $462.2 million for the nine months ended September 30, 2005 from $407.1
million for the same period in 2004. The growth in revenues is principally attributable to the net
addition of 61 centers over the past twelve months, enrollment growth in mature and
ramping centers and average tuition increases of approximately 4-5% at existing centers.
Gross Profit. Cost of services consists of center operating expenses, including payroll and
benefits for center personnel, facilities costs, which include depreciation, supplies and other
expenses incurred at the child care and early education center level. Gross profit increased $4.9
million, or 21.4%, to $27.8 million for the three months ended September 30, 2005 from $22.9
million for the same quarter in 2004. Gross profit increased $16.6 million, or 24.8%, to $83.5
million for the nine months ended September 30, 2005 from $66.9 million for the same period in
2004. As a percentage of revenue, gross profit increased to 18.0% for the three months ended
September 30, 2005 compared to 16.5% for the same quarter in 2004. As a percentage of revenue,
gross profit increased to 18.1% for the nine months ended September 30, 2005 compared to 16.4% for
the same period in 2004.
The increase in gross profit margin in absolute dollars and as a percentage of revenue for both the
three and nine month periods ended September 30, 2005 compared to the same periods in 2004 is
attributable to pacing tuition increases in advance of center based cost increases, particularly in
the area of personnel costs, as well as the cost control associated with closely managing staffing
levels. These measures offset the effects on gross margin of the seasonal variations, which
typically result from higher enrollment during the first and second quarter of each calendar year
(especially amongst the older age groups) and lower enrollment during the third calendar quarter as
older children transition to school. Lastly, contributions from newer centers acquired or added
through the transition of management have factored into margin performance as these centers operate
at mature performance levels.
Selling, General and Administrative Expenses (SGA). SGA consist of regional and division
management personnel, corporate management and administrative functions, and business development
expenses. SGA increased $1.7 million, or 15.3%, to $12.7 million for the three months ended
September 30, 2005 from $11.0 million for the same quarter in 2004. SGA increased $5.7 million, or
17.7%, to $38.0 million for the nine months ended September 30, 2005 from $32.3 million for the
same period in 2004. As a percentage of revenue, SGA increased to 8.2% for the three months ended
September 30, 2005 compared
13
to 7.9% for the same quarter in 2004. As a percentage of revenue, SGA
increased to 8.2% for the nine months ended September 30, 2005 compared to 7.9% for the same period
in 2004.
The dollar increase in SGA for the three and nine month periods ended September 30, 2005 as
compared to the same 2004 periods is primarily related to: increased spending on regional and
divisional operations management, as well as corporate and administrative personnel necessary to
support existing business and new growth opportunities, and increased costs of regulatory
compliance. The increase in SGA as a percentage of revenue for the three and nine month periods
ended September 30, 2005 as compared to the same periods in 2004 is primarily attributable to costs
incurred for compliance efforts for the Sarbanes-Oxley Act of 2002 (SOX). Specifically, the
Company recognized incremental expenses of approximately $400,000 in the first quarter of 2005
arising from spending for 2004 SOX compliance. The Company anticipates that the majority of costs
incurred during the initial SOX implementation year in 2004, which exceeded $2 million, will
continue in 2005 and beyond. However, this SOX spending is now embedded in base SGA and the Company
anticipates that it will regain its ability to leverage overhead costs with future revenue growth.
Amortization. Amortization expense on intangible assets other than goodwill totaled $442,000 and
$1.2 million for the three and nine month periods ended
September 30, 2005, respectively, as compared to $354,000
and $798,000 in the same periods for 2004. The increase was due to acquired intangibles which were
trade names, non-compete agreements, customer relationships and contract rights. In connection
with acquisitions made in 2005, the Company expects amortization expense for the full years of 2005
and 2006 to approximate $2.0 million and a range of $2.6 to $2.8 million, respectively.
Income from Operations. Income from operations totaled $14.7 million for the three month period
ended September 30, 2005, an increase of $3.1 million, or 27.2%, from $11.6 million in the same
period for 2004. Income from operations totaled $44.3 million for the nine month period ended
September 30, 2005, an increase of $10.5 million, or 31.0%, from $33.8 million in the same period
for 2004. This increase is primarily the result of the indicated revenue and gross margin
improvements partially offset by the increases in amortization expense and SGA expenses.
Interest Income. Interest income totaled $592,000 and $1.3 million for the three and nine month
periods ended September 30, 2005, which compares to $122,000 and $299,000 for the same periods in
2004. This increase in interest income for both the three and nine month periods in 2005 as
compared to 2004 is attributable to increased average investment yields and higher levels of
invested cash. Interest Income is expected to be lower for the remainder of 2005 and for 2006 due
to lower levels of cash on hand available for investing.
Interest Expense. Interest expense totaled $36,000 for the three month period ended September 30,
2005, a decrease of $14,000, or 28.0%, from $50,000 in the same period for 2004. Interest expense
totaled $123,000 for the nine month period ended September 30, 2005, a decrease of $9,000, or 6.8%,
from $132,000 in the same period for 2004. The decrease in interest expense for both the three and
nine month periods in 2005, compared to 2004, is due to the reduction of principal on notes
outstanding.
Income Tax Expense. The Companys effective income tax rate was approximately 40.9% for the nine
month period ended September 30, 2005 as compared to the effective income tax rate of 41.8% for the
same period in 2004. The decrease relates to proportionately higher pre-tax income in the Companys
foreign operations where the income tax expense rate is lower than domestic rates.
Liquidity and Capital Resources
The Companys primary cash requirements are the ongoing operations of its existing early care and
education centers and the addition of new centers through development or acquisition. The Companys
primary sources of liquidity have been cash flow from operations and existing cash balances. Cash
was $30.3 million at September 30, 2005. The Companys cash balances may be supplemented by
borrowings available under the Companys $60 million line of credit. There are currently no amounts
outstanding on the
14
line of credit. The Company had a working capital deficit of $20.3 million as
of September 30, 2005, primarily due to the 2005 cash acquisition activity, compared to a working
capital surplus of $11.8 million at December 31, 2004. The Company expects that it will continue to
generate positive cash flows from operating activities in 2005, and that the cash generated will
principally be utilized to fund future acquisitions and ongoing operations of its new and existing
early care and education centers, and will be sufficient to meet the Companys financial
obligations in 2005.
Cash
provided from operations was $48.8 million for the nine months ended September 30, 2005
compared to $31.7 million for the same period in 2004. The increase is primarily the result of
increases in net income, accounts payable and accrued expenses, the tax benefit realized from the exercise of stock options, and deferred revenue. The increases
in accounts payable and accrued expense balances were due principally to increases in payroll and
personnel related accruals (both of which are of a normal and recurring nature) for the nine month
period ended September 30, 2005 compared to the same period in 2004. The increases in deferred
revenue balances were due primarily to the timing of advance billings, which include tuition
collected at the beginning of the school year.
Cash used
in investing activities totaled $66.1 million for the nine month period ended September
30, 2005, compared to $26.9 million for the same period in 2004, with the increase largely
attributable to higher payments on acquisitions in 2005 compared to 2004. Fixed asset additions
totaled $9.8 million as of September 30, 2005 with $5.0 million related to new early care and
education centers and the remainder primarily related to the refurbishment of early care and
education centers. The Company anticipates its capital expenditures in the last quarter of 2005 to
be comparable to the average of the first nine months of 2005.
Cash provided by financing activities totaled $5.5 million for the nine months ended September 30,
2005 compared to $3.7 million for the same period in 2004. The Company received $6.1 million and
$4.2 million from the issuance of equity awards in the nine months ended September 30, 2005 and
2004, respectively.
Management believes that funds provided by operations, the Companys existing cash and cash
equivalent balances and borrowings available under its line of credit will be adequate to meet
planned operating and capital expenditure needs for at least the next 12 months. However, if the
Company were to make any significant acquisition(s) or investments in the purchase of facilities
for new or existing early care and education centers, 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.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No. (SFAS) 123R (revised 2004), Share-Based Payment. This statement requires
companies to measure and recognize the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value. SFAS 123R
replaces SFAS 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board No. (APB) 25,
Accounting for Stock Issued to Employees. In April 2005, the SEC postponed the effective date of
SFAS 123R until the fiscal year beginning after June 15, 2005. Although the Company has not yet
determined whether the adoption of SFAS 123R will result in amounts that are similar to the current
pro forma disclosures required under SFAS 123, the Company is
evaluating the requirements under SFAS
123R and expects the adoption to have an adverse impact on its
consolidated statements of income
and earnings per share.
In
June 2005, the FASB ratified Emerging Issues Task Force
consensus on Issue No. (EITF) 05-6, Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or
Acquired in a Business Combination. EITF 05-6 provides guidance regarding the
amortization period for leasehold improvements acquired in a business combination and the
amortization period of leasehold improvements that are placed in service significantly after and
not contemplated at the beginning of the lease term. EITF 05-6 will be effective beginning with the
Companys second quarter of fiscal 2006. The Company is evaluating the expected impact
that the adoption of EITF 05-6 will have on its consolidated financial position, results of
operations and cash flows.
15
Critical Accounting Policies and Estimates
In the Companys 2004 Annual Report on Form 10-K, the Company identified the critical
accounting policies upon which the consolidated financial statements were prepared as those
relating to revenue recognition, accounts receivable, goodwill and other intangibles, liability for
insurance obligations and income taxes. The Company has reviewed its policies and determined that
these remain the critical accounting policies for the quarter ended September 30, 2005. The Company
did not make any significant changes to these policies during 2005.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk There have been no material changes in the Companys investment strategies,
types of financial instruments held or the risks associated with such instruments which would
materially alter the market risk disclosures made in the Companys Annual Report on Form 10-K for
the year ended December 31, 2004.
Foreign Currency Exchange Rate Risk The Companys exposure to fluctuations in foreign currency
exchange rates is primarily the result of foreign subsidiaries domiciled in the United Kingdom,
Canada and Ireland. The Company does not currently use financial derivative instruments to hedge
foreign currency exchange rate risks associated with its foreign subsidiaries.
The assets and liabilities of the Companys Canada, Ireland, and United Kingdom subsidiaries are
translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at the average exchange rates prevailing during the period. The
cumulative translation effects for the subsidiaries are included in cumulative translation
adjustment in stockholders equity.
There have been no changes in the Companys foreign operations that would materially alter the
disclosures on foreign currency exchange risk made in the Companys Annual Report on Form 10-K for
the year ended December 31, 2004.
ITEM 4. Controls and Procedures
(a) Disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding required financial
disclosure.
The Company conducted an evaluation, under the supervision and with the participation of the
Companys Internal Disclosure Committee and management, including the CEO and CFO, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
September 30, 2005. The Company has not completed implementation of the changes it believes are
required to fully remediate the material weaknesses in internal control over financial reporting,
previously reported in the Companys Annual Report on Form 10-K for the year ended December 31,
2004, relating to maintaining effective controls over (i) the monthly reconciliation of cash
accounts for its operations in the United Kingdom, and (ii) the determination of certain
significant employee related accruals in accordance with generally accepted accounting principles.
As a result, the CEO and CFO have concluded that the Companys disclosure controls and procedures
were not effective as of September 30, 2005.
16
(b) Changes in internal control over financial reporting
During the first nine months of 2005, the Company has implemented, or is in the process of
implementing, the following remediation steps to correct the two material weaknesses identified:
(i) internal controls over the monthly reconciliation of cash accounts for the Companys operations
in the United Kingdom:
|
|
|
Management has performed a comprehensive treasury assessment to determine the optimal
account structure for the existing business and for planned growth in the United Kingdom; |
|
|
|
|
As part of this assessment, management established a plan to restructure the cash
depository and disbursement system to facilitate more timely review and resolution of
reconciling items; |
|
|
|
|
Management executed the restructuring plan during the quarter ended June 30, 2005, the
key elements of which included the establishment of additional control accounts over major
processes such as payroll and purchasing, which were deployed during the third quarter of
2005; and |
|
|
|
|
Management has increased oversight of routine monthly and quarterly account
reconciliation procedures to ensure compliance with established procedures. |
(ii) internal controls over the determination of certain significant employee related accruals in
accordance with generally accepted accounting principles:
|
|
|
Management has enhanced the documentation of the methodology employed to evaluate
significant accrual balances; and |
|
|
|
|
Management has implemented procedures to develop and maintain more thorough, detailed
contemporaneous analyses and assessments of significant account balances, and has expanded
the supporting source documents to include additional reporting from insurance carriers. |
The Company believes that these remediation steps will be sufficient to address the material
weaknesses discussed above. The completion of the implementation process includes an adequate
period for the controls to be functioning and tested, which management expects to occur during the
fourth quarter of 2005.
Except as discussed above, there were no changes in the Companys internal control over financial
reporting during its most recently completed fiscal quarter that have materially affected or are
reasonably likely to affect, the Companys internal control over financial reporting.
(c) Limitation on the effectiveness of internal control over financial reporting
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. The Companys internal control system is a process designed to provide
reasonable assurance to the Companys management and the board of directors regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined effective can provide only reasonable assurance with respect to
financial statement preparation and presentation, and internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods is subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
17
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings: Not Applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds: Not applicable
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:
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
Certification of the Companys Chief Executive Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
Certification of the Companys Chief Financial Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
Certification of the Companys Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
|
|
|
|
|
|
|
32.2 |
|
|
Certification of the Companys Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
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 9, 2005
|
|
|
|
|
|
|
|
|
BRIGHT HORIZONS FAMILY SOLUTIONS, INC. |
|
|
|
|
|
|
|
|
|
|
|
By: /s/ Elizabeth J. Boland |
|
|
|
|
|
|
|
|
|
|
|
|
|
Elizabeth J. Boland |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
(Duly Authorized Officer and Principal |
|
|
|
|
|
|
Financial and Accounting Officer) |
|
|
18