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 March 31,
1999.
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: 12,080,850 shares of common
stock, $.01 par value, at May 7, 1999.
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FORM 10-Q
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
A. Consolidated Balance Sheets at March 31, 1999 (Unaudited) and December 31, 1998 3
B. Consolidated Statements of Operations for the Three Months ended March 31, 1999
and 1998 (Unaudited) 4
C. Consolidated Statements of Cash Flows for the Three Months ended March 31, 1999
and 1998 (Unaudited) 5
D. Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities and Use of Proceeds 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other information 13
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
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Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets
(in thousands except share data)
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 22,236 $ 20,439
Accounts receivable, net 16,140 13,302
Income taxes receivable 3,476 2,243
Prepaid expenses and other current assets 1,854 1,520
Current deferred tax asset 4,642 4,579
--------- --------
Total current assets 48,348 42,083
Fixed assets, net 33,303 31,482
Deferred charges, net 749 693
Goodwill and other intangible assets, net 14,771 14,095
Non-current deferred tax asset 2,599 2,599
Other assets 809 511
--------- --------
Total assets $ 100,579 $ 91,463
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt and
obligations under capital leases $ 67 $ 67
Accounts payable and accrued expenses 20,342 21,759
Deferred revenue, current portion 9,960 7,565
Other current liabilities 1,733 652
--------- --------
Total current liabilities 32,102 30,043
Long term debt and obligations under
capital leases 119 618
Accrued rent 1,520 1,560
Other long term liabilities 2,729 2,731
Deferred revenue, net of current portion 3,025 3,131
--------- --------
Total liabilities 39,495 38,083
--------- --------
Stockholders' equity (deficit):
Common Stock $.01 par value, 30,000,000 shares
authorized, 12,074,000 and 11,554,000 shares issued and
outstanding at March 31,1999 and December 31, 1998 121 115
Additional paid in capital 73,384 67,589
Accumulated deficit (12,421) (14,324)
--------- --------
Total stockholders' equity 61,084 53,380
--------- --------
Total liabilities and stockholders' equity $ 100,579 $ 91,463
========= ========
The accompanying notes are an integral part of
the consolidated financial statements
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4
Bright Horizons Family Solutions, Inc.
Consolidated Statements of Operations
(in thousands except per share data)
(Unaudited)
Three months ended March 31,
1999 1998
Revenues $58,461 $48,868
Cost of services 50,087 42,020
------- -------
Gross profit 8,374 6,848
Selling, general and administrative 5,127 4,550
Amortization 229 238
------- -------
Income from operations 3,018 2,060
Net interest income 211 280
------- -------
Income before tax 3,229 2,340
Income tax provision 1,324 965
------- -------
Net income $ 1,905 $ 1,375
======= =======
Earnings per share - basic $ 0.16 $ 0.13
======= =======
Weighted average shares - basic 11,785 10,940
======= =======
Earnings per share - diluted $ 0.15 $ 0.11
======= =======
Weighted average shares - diluted 12,737 12,332
======= =======
The accompanying notes are an integral part of
the consolidated financial statements
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Bright Horizons Family Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended March 31,
1999 1998
Net income $ 1,905 $ 1,375
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,011 875
Loss on disposal of fixed assets 7 --
Deferred income taxes -- (214)
Changes in assets and liabilities:
Accounts receivable, trade (2,755) (978)
Income taxes receivable 980 --
Prepaid expenses and other current assets 301 515
Accounts payable and accrued expenses (1,404) 2,676
Income taxes payable -- 750
Deferred revenue 2,092 1,458
Accrued rent (41) 88
Other long-term assets 104 (177)
Other current and long-term liabilities 254 566
-------- --------
Total adjustments 549 5,559
-------- --------
Net cash provided by operating activities 2,454 6,934
-------- --------
Cash flows from investing activities:
Additions to fixed assets, net of acquired amounts (2,719) (3,387)
Proceeds from disposal of fixed assets 15 41
(Increase) decrease in deferred charges (56) 2
Increase in other investments (400) --
Payments for acquisitions (587) --
-------- --------
Net cash used for investing activities (3,747) (3,344)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,588 1,069
Purchase of treasury stock -- (1,134)
Principal payments of long term debt and
obligations under capital leases (498) (21)
-------- --------
Net cash provided by (used for) financing activities 3,090 (86)
-------- --------
Net increase in cash and cash equivalents 1,797 3,504
Cash and cash equivalents, beginning of period 20,439 25,384
-------- --------
Cash and cash equivalents, end of period $ 22,236 $ 28,888
======== ========
Non-cash financing activities:
Tax benefit related to stock option exercises $ 2,211 $ 451
======== ========
Supplemental cash flow information:
Cash payments for interest $ 34 $ 20
======== ========
Cash payments for income taxes $ 352 $ 429
======== ========
The accompanying notes are an integral part of
the consolidated financial statements
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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 family 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 and
reimbursement for operating expenses from corporate sponsors for its childcare
services.
BUSINESS COMBINATION AND BASIS OF PRESENTATION -- The accompanying financial
statements have been prepared by the Company in accordance with the accounting
policies described in the Company's audited financial statements included in the
Company's Annual Report on Form 10-K dated March 31, 1999, 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 March 31, 1999 and the results of
its operations and cash flows for the three month periods ended March 31, 1999
and 1998, 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 January 1999 the Company adopted the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"), issued by the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants. SOP 98-5 requires the costs
of start-up activities and organization costs, as defined, to be expensed as
incurred. The adoption did not have a material impact on the Company's results
of operation, financial condition or cash flow.
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2. Other Charges
In connection with the Merger, the Company recognized a charge of $7.5 million
($5.4 million after tax) in the three month period ended September 30, 1998,
which included transaction costs of $2.8 million, non cash asset impairment
charges of $1.3 million, severance costs of $0.5 million and one time
incremental integration costs directly related to the Merger totaling $2.9
million. At March 31, 1999, $1.7 million of these costs are included in accrued
expenses in the accompanying consolidated balance sheet. The Company expects the
majority of the accrued liability associated with the charge to be paid by
September 30, 1999.
3. Earnings Per Share
Earnings per share has been calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share", ("SFAS 128"), which
established standards for computing and presenting earnings per share. The
computation of net earnings 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. For the three-month periods
ended March 31, 1999 and 1998, the Company had no warrants or preferred stock
outstanding.
The following tables present information necessary to calculate earnings per
share:
Three months Ended March 31, 1999
-----------------------------------------------
Earnings Shares Per Share
(Numerator) Denominator) Amount
---------- ------------ -------------
Basic earnings per share:
Income available to common stockholders $1,905,000 11,785,000 $ 0.16
=============
Effect of dilutive securities:
Stock options -- 952,000
---------- ---------- -------------
Diluted earnings per share $1,905,000 12,737,000 $ 0.15
========== ========== =============
Three months Ended March 31, 1998
-----------------------------------------------
Earnings Shares Per Share
(Numerator) Denominator) Amount
---------- ------------ -------------
Basic earnings per share:
Income available to common stockholders $1,375,000 10,940,000 $ 0.13
=============
Effect of dilutive securities:
Stock options -- 1,392,000
---------- ---------- -------------
Diluted earnings per share $1,375,000 12,332,000 $ 0.11
========== ========== =============
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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 behalf 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 from any future results, performance, or
achievements expressed or implied by such forward-looking statements. See "Risk
Factors" included in the Company's Annual Report on Form 10-K dated March 31,
1999 and incorporated herein by reference for a description of a number of risks
and uncertainties which could affect actual results.
General
The Company provides workplace services for employers and families, including
childcare, early education and strategic worklife consulting, operating 284
child development centers at March 31, 1999. During the three month period
ending March 31, 1999 the Company opened 13 new family centers, and closed 3
which were not meeting operating objectives. The Company has the capacity to
serve more than 35,000 children in 35 states and the District of Columbia and
has partnerships with many of the nation's leading employers, including 68
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 family centers as well as
increased enrollment at existing family 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 school 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.
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RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenue for the periods ending March 31, 1999 and 1998:
Three Months Ended
March 31,
1999 1998
------ ------
Revenue 100.0% 100.0%
Cost of services 85.7 86.0
------ ------
Gross profit 14.3 14.0
Selling, general & administrative 8.8 9.3
Amortization 0.4 0.5
------ ------
Income from operations 5.1 4.2
Net interest income 0.4 0.6
------ ------
Income before income taxes 5.5 4.8
Income tax provision 2.2 2.0
------ ------
Net income 3.3% 2.8%
====== ======
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
Revenue. Revenue increased $9.6 million, or 19.6%, to $58.5 million for the
three months ended March 31, 1999 from $48.9 million for the three months ended
March 31, 1998. The growth in revenues is primarily attributable to the net
addition of 29 family centers since March 31, 1998, 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 $1.6 million, or 22.3%, to $8.4 million for the three months
ended March 31, 1999 from $6.8 million for the three months ended March 31,
1998. As a percentage of revenue, gross profit increased to 14.3% for the three
months ended March 31, 1999 compared to 14.0% for the same period in 1998.
The Company showed a modest increase in gross profit margins for the three-month
period in 1999 compared to the three-month period of 1998 as a result of a
greater proportion of centers achieving mature operating levels. The Company
also experienced stronger operating performance in newer family centers that
have been open less than two years, as compared to family centers open less than
two years in the same period in 1998.
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
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existing centers. Selling, general and administrative expenses increased
$577,000, or 12.7%, to $5.1 million for the three months ended March 31, 1999
from $4.6 million for the three months ended March 31, 1998. As a percentage of
revenue, selling, general and administrative expenses decreased to 8.8% for the
three months ended March 31, 1999 from 9.3% for the same 1998 period.
The decrease in selling, general and administrative expenses as a percentage of
revenue during the first three 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.
Income from Operations. Income from operations totaled $3.0 million for the
three months ended March 31, 1999, an increase of $960,000, or 46.5%, from $2.1
million in the same 1998 period.
Net Interest Income. Net interest income of $211,000 for the three months ended
March 31, 1999 decreased $69,000 from $280,000 of net interest income for the
three months ended March 31, 1998. The decrease in interest income is
attributable to lower levels of invested cash from the same period in 1998.
Income Taxes Provision. The Company's effective income tax rate was
approximately 41% for the three months ended March 31, 1999 and 1998.
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 sources of liquidity have been proceeds from
the initial public offerings and cash flow from operations, supplemented by
borrowing capacity under the Company's $15 million revolving lines of credit
with two banks. The Company had working capital of $16.2 million and $12.0
million as of March 31, 1999 and December 31, 1998, respectively.
Cash provided from operations decreased to $2.5 million for the three months
ended March 31, 1999, from $6.9 million for the three months ended March 31,
1998. Accounts receivable, net of acquired amounts, increased by $2.8 million,
which is attributable to increased revenues, the timing of collections, and
amounts billable to clients for start-up expenses associated with new centers.
Accounts payable and accrued expenses, net of acquired amounts, decreased by
$1.4 million in the three months ended March 31, 1999, primarily attributable to
a reduction of accrued payroll costs from year end. On a comparable basis, the
Company had approximately the same relative level of accounts payable and
accrued expenses as the same three-month period in 1998. The Company also
experienced a modest increase in deferred revenue associated with fees paid in
advance during the three months ended March 31, 1999 as compared with the three
months ended March 31, 1998.
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Cash used for investing activities increased to $3.7 million for the three
months ended March 31, 1999 from $3.3 million for the three months ended March
31, 1998. The increase was the result of expenditures for small acquisitions and
investments, offset by lower levels of fixed asset additions. Of the $2.7
million of fixed asset additions for the three months ended March 31, 1999,
approximately $1.3 million relates to new family centers, with the remaining
balance being primarily utilized for the refurbishment and expansion of existing
family centers. Management expects the current level of center related fixed
asset spending to increase slightly for the remainder of 1999.
Cash provided by (used for) financing activities increased to $3.1 million for
the three months ended March 31, 1999, from ($86,000) for the three months ended
March 31, 1998. During the three months ended March 31, 1999, the Company
received $3.6 million in net proceeds from the issuance of Common Stock
associated with the exercise of stock options, as compared to $1.1 million in
the same period in 1998. In the three months ended March 31, 1999, the Company
also repaid debt of $500,000, including the retirement of an outstanding
mortgage. In the three month period ended March 31, 1998, the Company
repurchased shares of its Common Stock which were subsequently reissued to
fulfill warrant and stock option exercises.
Management believes that funds provided by operations and the Company's existing
cash and cash equivalent balances and borrowings available under lines of credit
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.
YEAR 2000 CONVERSION
The term "Year 2000 issue" refers to the necessity of converting computer
information systems so that such systems recognize more than two digits to
identify a year in any given date field and are thereby able to differentiate
between years in the twentieth and twenty-first centuries ending with the same
two digits (e.g. 1900 and 2000). 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 or disruption to its business operations. The Company is also
evaluating non-system issues relative to the Year 2000 and beyond.
The Company has communicated with suppliers, customers, financial institutions
and others with which it does business to coordinate Year 2000 conversion and
will continue to monitor their progress to assess the potential impact in the
event of non-compliance. The Company believes the potential failure of third
parties' systems will not have a material adverse impact on the Company's
operations, cash flows or financial condition.
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The Company completed several projects as part of planned upgrades or
replacements and not as part of the Company's Year 2000 conversion. The Company
believes that the implementation of these projects had the effect of making a
majority of the Company's hardware and information systems Year 2000 compliant.
During the three months ended March 31, 1999, as part of normal upgrades and
replacements, the Company spent approximately $600,000 to upgrade information
technology. The Company anticipates that it will make additional capital
expenditures of approximately $200,000 to $600,000 to upgrade its hardware and
information systems in 1999. The upgrades planned for 1999 are part of planned
upgrades or replacements done in the normal course of business and not as part
of the Company's Year 2000 conversion. The projected costs for 1999 are based
upon management's best estimates, which were derived utilizing numerous
assumptions of future events. There can be no guarantee however, that these cost
estimates will be achieved, and actual results could differ materially. The
Company believes that the Company's past efforts, in conjunction with the
planned upgrades and replacements in 1999, will substantially make its hardware
and information systems Year 2000 compliant.
As part of its Year 2000 preparations, the Company has identified its most
reasonably likely worst case scenario as the replacement of hardware, software
and equipment that are not Year 2000 compliant. Notwithstanding the foregoing,
management does not currently believe that the costs of assessment, remediation
or replacement of the Company's systems will have a material adverse effect on
the Company's operations, cash flows or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's 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
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings:
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
(d) Application of Proceeds from Initial Public Offerings
Pursuant to a Registration Statement on Form S-1, as amended (Registration No.
333-14981), which was declared effective on November 6, 1997, BRHZ completed an
initial public offering of 3,415,500 shares of BRHZ common stock, of which
1,350,000 shares of BRHZ common stock were issued and sold by BRHZ and 2,065,500
shares were sold by selling stockholders, at an offering price of $13.00 per
share. BRHZ received net proceeds of approximately $15.6 million (after
deducting underwriting discounts and other expenses). Approximately $4.0 million
was used to repay outstanding indebtedness.
Pursuant to a Registration Statement on Form S-1 , as amended (Registration No.
333-29523), which was declared effective on August 12, 1997, CFAM completed an
initial public offering of 2,702,500 shares of CFAM common stock, of which
1,401,386 shares were issued and sold by CFAM and 1,301,114 shares were sold by
selling shareholders, at an offering price of $10.00 per share. CFAM received
net proceeds of approximately $12.1 million (after deducting underwriting
discounts and expenses). Approximately $3.7 million was used to repay all of
CFAM's then outstanding bank borrowings.
The Company intends to use the remaining proceeds from the initial public
offerings of BRHZ and CFAM for working capital and general corporate purposes,
including the merger and integration of the operations of BRHZ and CFAM and the
financing of potential acquisitions and new centers under development.
ITEM 3. Defaults Upon Senior Securities:
None
ITEM 4. Submission of Matters to a Vote of Security Holders:
None
ITEM 5. Other information:
Not Applicable
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ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 27 (for SEC use only)
(b) Reports on Form 8-K:
None
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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: May 14, 1999
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)
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EXHIBIT INDEX
27 Financial Data Schedule (for Commission use only)
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