##### Table of Contents



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 June 30, 2006.
 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
    
    62-1742957(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 
 
 þ o
  þ o o
 o þ




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##### 



FORM 10-Q
INDEX
 PageNumberPART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsA.   Condensed Consolidated Balance Sheets at June 30, 2006 (Unaudited) and December 31, 2005
    
    
    3B.   Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    4C.   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    5D.   Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22ITEM 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    23ITEM 1A Risk Factors
    
    
    23ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23ITEM 3. Defaults Upon Senior Securities
    
    
    24ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    24ITEM 5. Other Information
    
    
    25ITEM 6. Exhibits
    
    
    25SIGNATURE
    
    
    26EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




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##### Table of Contents



June 30,2006
    
    
    December 31,(Unaudited)
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,874
    
    
    $
    21,650Accounts receivable, net
    
    
    32,906
    
    
    
    28,738Prepaid expenses and other current assets
    
    
    14,356
    
    
    
    14,472Current deferred tax asset
    
    
    14,072
    
    
    
    14,235Total current assets
    
    
    76,208
    
    
    
    79,095Fixed assets, net
    
    
    124,330
    
    
    
    116,462Goodwill, net
    
    
    123,264
    
    
    
    120,507Other intangibles, net
    
    
    27,882
    
    
    
    28,720Non-current deferred tax asset
    
    
    8,098
    
    
    
    6,467Other assets
    
    
    2,550
    
    
    
    2,448Total assets
    
    $
    362,332
    
    
    $
    353,699LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    605
    
    
    $
    628Accounts payable and accrued expenses
    
    
    53,143
    
    
    
    54,478Deferred revenue, current portion
    
    
    45,300
    
    
    
    40,018Income tax payable
    
    
    9,755
    
    
    
    3,260Other current liabilities
    
    
    13,225
    
    
    
    5,727Total current liabilities
    
    
    122,028
    
    
    
    104,111Longterm debt, net of current portion
    
    
    419
    
    
    
    684Accrued rent
    
    
    9,422
    
    
    
    7,440Other long-term liabilities
    
    
    6,842
    
    
    
    5,916Deferred revenue, net of current portion
    
    
    14,745
    
    
    
    16,174Deferred income taxes
    
    
    2,322
    
    
    
    2,195Total liabilities
    
    
    155,778
    
    
    
    136,520Stockholders equity:Preferred stock: 5,000,000 shares authorized, none issued or
outstandingCommon stock: $.01 par valueAuthorized: 50,000,000 shares at both June 30, 2006
and December 31, 2005Issued: 27,717,000 and 27,462,000 shares at June
30, 2006 and December 31, 2005, respectivelyOutstanding: 26,270,000 and 27,144,000 shares at
June 30, 2006 and December 31, 2005, respectively
    
    
    277
    
    
    
    274Additional paid-in capital
    
    
    117,605
    
    
    
    112,511Deferred compensation
    
    
    
    
    
    
    (1,231
    )Treasury stock: 1,447,000 and 318,000 shares at cost, at June 30, 2006 and
December 31, 2005, respectively
    
    
    (51,215
    )
    
    
    (11,234
    )Cumulative translation adjustment
    
    
    5,318
    
    
    
    3,155Retained earnings
    
    
    134,569
    
    
    
    113,704Total stockholders equity
    
    
    206,554
    
    
    
    217,179Total liabilities and stockholders equity
    
    $
    362,332
    
    
    $
    353,699
  3




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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    175,232
    
    
    $
    157,017
    
    
    $
    344,371
    
    
    $
    307,775Cost of services
    
    
    139,940
    
    
    
    128,279
    
    
    
    276,174
    
    
    
    252,134Gross profit
    
    
    35,292
    
    
    
    28,738
    
    
    
    68,197
    
    
    
    55,641Selling, general and administrative
    
    
    15,835
    
    
    
    12,763
    
    
    
    31,020
    
    
    
    25,322Amortization
    
    
    751
    
    
    
    384
    
    
    
    1,361
    
    
    
    760Income from operations
    
    
    18,706
    
    
    
    15,591
    
    
    
    35,816
    
    
    
    29,559Interest income
    
    
    115
    
    
    
    419
    
    
    
    290
    
    
    
    684Interest expense
    
    
    (36
    )
    
    
    (49
    )
    
    
    (93
    )
    
    
    (87
    )Income before taxes
    
    
    18,785
    
    
    
    15,961
    
    
    
    36,013
    
    
    
    30,156Income tax expense
    
    
    7,910
    
    
    
    6,500
    
    
    
    15,148
    
    
    
    12,336Net income
    
    $
    10,875
    
    
    $
    9,461
    
    
    $
    20,865
    
    
    $
    17,820Earnings per
share  basic
    
    $
    0.41
    
    
    $
    0.35
    
    
    $
    0.78
    
    
    $
    0.66Weighted average number of common shares 
basic
    
    
    26,425
    
    
    
    27,057
    
    
    
    26,660
    
    
    
    26,976Earnings per share  diluted
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    0.75
    
    
    $
    0.63Weighted average number of common and common
equivalent shares  diluted
    
    
    27,484
    
    
    
    28,365
    
    
    
    27,752
    
    
    
    28,285
  4




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Six months endedJune 30,2006
    
    
    2005Net income
    
    $
    20,865
    
    
    $
    17,820Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    8,660
    
    
    
    6,787Non-cash revenue and other
    
    
    (476
    )
    
    
    (640
    )Loss on disposal of fixed assets
    
    
    44
    
    
    
    16Stock based compensation
    
    
    1,702
    
    
    
    507Deferred income taxes
    
    
    (1,464
    )
    
    
    (1,262
    )Tax benefit realized from the exercise of stock
options
    
    
    
    
    
    
    2,313Changes in assets and liabilities:Accounts receivable
    
    
    (4,016
    )
    
    
    (3,735
    )Prepaid expenses and other current assets
    
    
    (168
    )
    
    
    (329
    )Accounts payable and accrued expenses
    
    
    (2,109
    )
    
    
    12,124Income taxes
    
    
    6,876
    
    
    
    4,254Deferred revenue
    
    
    7,909
    
    
    
    7,164Accrued rent
    
    
    1,970
    
    
    
    549Other assets
    
    
    (776
    )
    
    
    (248
    )Other current and long-term liabilities
    
    
    4,670
    
    
    
    2,879Net cash provided by operating activities
    
    
    43,687
    
    
    
    48,199Cash flows from investing activities:Additions to fixed assets, net of acquired amounts
    
    
    (14,301
    )
    
    
    (5,486
    )Proceeds from the disposal of fixed assets
    
    
    134
    
    
    
    Payments for acquisitions, net of cash acquired
    
    
    (584
    )
    
    
    (6,762
    )Net cash used in investing activities
    
    
    (14,751
    )
    
    
    (12,248
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (39,981
    )
    
    
    Proceeds from the issuance of common stock
    
    
    3,057
    
    
    
    4,475Excess tax benefit from stock-based compensation
    
    
    1,142
    
    
    
    Principal payments of long term debt
    
    
    (290
    )
    
    
    (387
    )Net cash (used in) provided by financing activities
    
    
    (36,072
    )
    
    
    4,088Effect of exchange rates on cash balances
    
    
    360
    
    
    
    (342
    )Net (decrease) increase in cash and cash equivalents
    
    
    (6,776
    )
    
    
    39,697Cash and cash equivalents, beginning of period
    
    
    21,650
    
    
    
    42,472Cash and cash equivalents, end of period
    
    $
    14,874
    
    
    $
    82,169Supplemental cash flow information:Cash payments of interest
    
    $
    73
    
    
    $
    87Cash payments of income taxes
    
    $
    8,491
    
    
    $
    7,293
  5




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ITEM 1.D. Notes to Condensed Consolidated Financial Statements (Unaudited)
  Organization
  Basis of Presentation
   Segment Information
 Stock-Based Compensation
 6




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7




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Three months ended:
    
    
    Six months ended:June 30, 2006
    
    
    June 30, 2006(In thousands)Cost of services
    
    $
    84
    
    
    $
    167Selling, general and
administrative
    
    
    856
    
    
    
    1,535Stock-based compensation before
tax
    
    
    940
    
    
    
    1,702Income tax benefit
    
    
    276
    
    
    
    474Net compensation expense
    
    $
    664
    
    
    $
    1,228
  Three months ended:
    
    Six months ended:June 30, 2006
    
    June 30, 2006Basic earnings per share
    
    $
    (0.03
    )
    
    $
    (0.05
    )Diluted earnings per share
    
    $
    (0.02
    )
    
    $
    (0.04
    )
   8




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Three months ended:
    
    Six months ended:June 30, 2005
    
    June 30, 2005(In thousands, except per share data)Net income:As reported
    
    $
    9,461
    
    
    $
    17,820Add:
Stock-based compensation
expense included in reported net
income, net of related tax effects
    
    
    150
    
    
    
    330Deduct:
Total stock-based
compensation expense
determined under fair value based
method for all awards, net of
related tax effects
    
    
    (1,729
    )
    
    
    (3,147
    )Pro forma
    
    $
    7,882
    
    
    $
    15,003Earnings per shareBasic:As reported
    
    $
    0.35
    
    
    $
    0.66Pro forma
    
    $
    0.29
    
    
    $
    0.56Earnings per shareDiluted:As reported
    
    $
    0.33
    
    
    $
    0.63Pro forma
    
    $
    0.28
    
    
    $
    0.53
  Stock Options
  Three months ended:
    
    Six months ended:June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected stock price volatility
    
    
    41.3
    %
    
    
    45.1
    %
    
    
    41.6
    %
    
    
    45.6
    %Risk free interest rate
    
    
    5.19
    %
    
    
    3.36
    %
    
    
    4.91
    %
    
    
    3.36
    %Expected life of options
    
    5.9 years
    
    5.9 years
    
    6.0 years
    
    6.0 yearsWeighted-average fair value
per share of options
granted during the period
    
    $
    16.95
    
    
    $
    17.68
    
    
    $
    16.96
    
    
    $
    16.17
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WeightedAverage
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    AverageContractual
    
    Number of
    
    ExerciseLife in Years
    
    Shares
    
    PriceOutstanding at January 1,
2006
    
    
    5.5
    
    
    
    2,152,106
    
    
    $
    15.94Granted
    
    
    
    
    
    
    183,810
    
    
    
    35.34Exercised
    
    
    
    
    
    
    (213,320
    )
    
    
    12.09Forfeited or Expired
    
    
    
    
    
    
    (30,746
    )
    
    
    14.28Outstanding at June 30, 2006
    
    
    5.3
    
    
    
    2,091,850
    
    
    $
    18.06Exercisable at June 30, 2006
    
    
    4.7
    
    
    
    1,382,301
    
    
    $
    13.86
   WeightedAverage
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    AverageContractual
    
    Number of
    
    ExerciseLife in Years
    
    Shares
    
    PriceOutstanding at January 1, 2006
    
    
    6.5
    
    
    
    861,506
    
    
    $
    19.68Granted
    
    
    
    
    
    
    183,810
    
    
    
    35.34Vested
    
    
    
    
    
    
    (326,567
    )
    
    
    13.93Forfeited
    
    
    
    
    
    
    (9,200
    )
    
    
    29.39Outstanding at June 30, 2006
    
    
    6.4
    
    
    
    709,549
    
    
    $
    26.25
   10




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Restricted Stock Awards
   WeightedNumber of
    
    AverageShares
    
    Fair ValueOutstanding at January 1, 2006
    
    
    93,100
    
    
    $
    21.44Granted
    
    
    40,665
    
    
    
    23.35Vested
    
    
    (7,600
    )
    
    
    23.60Forfeited or Expired
    
    
    
    
    
    
    Outstanding at June 30, 2006
    
    
    126,165
    
    
    $
    21.93
      11




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Comprehensive Income
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005(In thousands)Net income
    
    $
    10,875
    
    
    $
    9,461
    
    
    $
    20,865
    
    
    $
    17,820Foreign currency
translation adjustments
    
    
    1,786
    
    
    
    ( 2,478
    )
    
    
    2,163
    
    
    
    (3,436
    )Comprehensive income
    
    $
    12,661
    
    
    $
    6,983
    
    
    $
    23,028
    
    
    $
    14,384
 Foreign
Currency
 Recently Issued Accounting Pronouncements
 12




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Three months ended June 30, 2006Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    10,875
    
    
    
    26,425
    
    
    $
    0.41Effect of dilutive securities:stock options and
restricted stock
    
    
    
    
    
    
    1,059Diluted earnings per share
    
    $
    10,875
    
    
    
    27,484
    
    
    $
    0.40
 Three months ended June 30, 2005Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    9,461
    
    
    
    27,057
    
    
    $
    0.35Effect of dilutive securities:stock options and
restricted stock
    
    
    
    
    
    
    1,308Diluted earnings per share
    
    $
    9,461
    
    
    
    28,365
    
    
    $
    0.33
 Six months ended June 30, 2006Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    20,865
    
    
    
    26,660
    
    
    $
    0.78Effect of dilutive securities:stock options and
restricted stock
    
    
    
    
    
    
    1,092Diluted earnings per share
    
    $
    20,865
    
    
    
    27,752
    
    
    $
    0.75
 13




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Six months ended June 30, 2005Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    17,820
    
    
    
    26,976
    
    
    $
    0.66Effect of dilutive securities:stock options and
restricted stock
    
    
    
    
    
    
    1,309Diluted earnings per share
    
    $
    17,820
    
    
    
    28,285
    
    
    $
    0.63
       14




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ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    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;
    
    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;
 15




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
    
    our inability to maintain effective internal controls over financial reporting;
and,
    
    our inability to obtain insurance at the same levels or at costs comparable to
those incurred historically.
  Executive Summary and Discussion
 Fortune 500 Working Mother Magazines
  Industry Classification
    
    Percentage of CentersConsumer
    
    
    5
    %Financial Services
    
    
    15
    %Government and Education
    
    
    15
    %Healthcare
    
    
    10
    %Industrial/Manufacturing
    
    
    10
    %Office Park Consortiums
    
    
    25
    %Pharmaceutical
    
    
    5
    %Professional Services and Other
    
    
    5
    %Technology
    
    
    10
    %
 The Companys overall business strategy is centered on several key elements: identifying and
executing on growth opportunities; achieving sustainable operating margin
 16




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improvement; maintaining its competitive advantage as the employer of choice in its field; and,
continuing the high quality of its programs and customer satisfaction.
    17




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Seasonality
 Results of Operations
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    79.9
    
    
    
    81.7
    
    
    
    80.2
    
    
    
    81.9Gross profit
    
    
    20.1
    
    
    
    18.3
    
    
    
    19.8
    
    
    
    18.1Selling, general & administrative
    
    
    9.0
    
    
    
    8.1
    
    
    
    9.0
    
    
    
    8.2Amortization
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.3Income from operations
    
    
    10.7
    
    
    
    9.9
    
    
    
    10.4
    
    
    
    9.6Interest income
    
    
    0.0
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.2Interest expense
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Income before income taxes
    
    
    10.7
    
    
    
    10.2
    
    
    
    10.5
    
    
    
    9.8Income tax provisions
    
    
    4.5
    
    
    
    4.2
    
    
    
    4.4
    
    
    
    4.0Net income
    
    
    6.2
    %
    
    
    6.0
    %
    
    
    6.1
    %
    
    
    5.8
    %
 Three and Six Months Ended June 30, 2006 Compared to the Three and Six Months Ended June 30,
2005
 Revenue
 18




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Gross Profit
   Selling, General and Administrative Expenses (SGA)
 19




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Amortization.
 Income from Operations
 Interest Income and Expense.
 Income Tax Expense
 Liquidity and Capital Resources
  20




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21




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Recently Issued Accounting Pronouncements
  Critical Accounting Policies and Estimates
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
      22




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ITEM 4. Controls and Procedures
      
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  23




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Issuer Purchases of Equity SecuritiesTotal Number of
    
    
    Maximum NumberShares Purchased as
    
    
    of Shares that MayTotal Number
    
    
    
    
    
    
    Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    ProgramsApril 1-30, 2006
    
    
    
    
    
    
    
    
    
    
    2,010,377
    
    
    
    489,623May 1-31, 2006
    
    
    236,110
    
    
    $
    36.24
    
    
    
    2,246,487
    
    
    
    253,513June 1-30, 2006
    
    
    234,607
    
    
    $
    35.81
    
    
    
    2,481,094
    
    
    
    3,018,906Total
    
    
    470,717
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  Nominee
    
    
    
    
    
    For
    
    Against/WithheldE. Townes Duncan
    
    (Class II)
    
    
    23,155,330
    
    
    
    981,748David Gergen
    
    (Class II)
    
    
    23,704,099
    
    
    
    432,979Sara Lawrence-Lightfoot
    
    (Class II)
    
    
    23,623,325
    
    
    
    513,753David H. Lissy
    
    (Class II)
    
    
    23,346,383
    
    
    
    790,695
  Name
    
    
    
    
    
    Term ExpiresJoshua Bekenstein
    
    (Class I)
    
    
    2008JoAnne Brandes
    
    (Class I)
    
    
    2008Roger H. Brown
    
    (Class I)
    
    
    2008Marguerite Kondracke (Sallee)
    
    (Class I)
    
    
    2008Fred K. Foulkes
    
    (Class III)
    
    
    2007Linda A. Mason
    
    (Class III)
    
    
    2007Ian M. Rolland
    
    (Class III)
    
    
    2007Mary Ann Tocio
    
    (Class III)
    
    
    2007
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##### Table of Contents



Proposal 2-Approval ofBright Horizons FamilySolutions, Inc. 2006 Equity
    
    
    
    
    
    Against/
    
    Abstain/Brokerand Incentive Plan
    
    For
    
    Withheld
    
    Non Vote17,032,791
    
    
    
    4,053,271
    
    
    
    3,051,016
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 Exhibits:31.1
    
    Certification of the Companys 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 200231.2
    
    Certification of the Companys 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 200232.1
    
    Certification of the Companys Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Companys Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 25




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##### Table of Contents



SIGNATURE
  Date: August 9, 2006BRIGHT HORIZONS FAMILY SOLUTIONS, INC.By:
    
    /s/ Elizabeth J. Boland

Elizabeth J. BolandChief Financial Officer(Duly Authorized Officer and Principal Financial and Accounting Officer)
 26