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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 March 31, 2006.
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________________
to ____________.
 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)
 
 
 x 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 March 31, 2006 (unaudited) and December 31, 2005
    
    
    3B.   Condensed Consolidated
Statements of Income for the Three Months ended March 31, 2006 and
2005 (unaudited)
    
    
    4C.   Condensed Consolidated
Statements of Cash Flows for the Three Months ended March 31, 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
    
    
    13ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20ITEM 4.
    
    Controls and Procedures
    
    
    21PART II.
    
    OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    22ITEM 1A
    
    Risk Factors
    
    
    22ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    22ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22ITEM 5.
    
    Other Information
    
    
    22ITEM 6.
    
    Exhibits
    
    
    23SIGNATURE
    
    
    
    
    
    
    24Ex-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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March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    23,228
    
    
    $
    21,650Accounts receivable, net
    
    
    33,299
    
    
    
    28,738Prepaid expenses and other current assets
    
    
    14,521
    
    
    
    14,472Current deferred tax asset
    
    
    13,190
    
    
    
    14,235Total current assets
    
    
    84,238
    
    
    
    79,095Fixed assets, net
    
    
    120,029
    
    
    
    116,462Goodwill, net
    
    
    121,565
    
    
    
    120,507Other intangibles, net
    
    
    28,284
    
    
    
    28,720Non-current deferred tax asset
    
    
    6,418
    
    
    
    6,467Other assets
    
    
    2,443
    
    
    
    2,448Total assets
    
    $
    362,977
    
    
    $
    353,699LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    613
    
    
    $
    628Accounts payable and accrued expenses
    
    
    58,409
    
    
    
    54,478Deferred revenue, current portion
    
    
    50,375
    
    
    
    40,018Income tax payable
    
    
    4,597
    
    
    
    3,260Other current liabilities
    
    
    9,493
    
    
    
    5,727Total current liabilities
    
    
    123,487
    
    
    
    104,111Long-term debt, net of current portion
    
    
    530
    
    
    
    684Accrued rent
    
    
    7,314
    
    
    
    7,440Other long-term liabilities
    
    
    6,011
    
    
    
    5,916Deferred revenue, net of current portion
    
    
    15,636
    
    
    
    16,174Deferred income taxes
    
    
    2,220
    
    
    
    2,195Total liabilities
    
    
    155,198
    
    
    
    136,520Stockholders equity:Preferred stock: 5,000,000 shares authorized, none issued or outstandingCommon stock: $.01 par valueAuthorized: 50,000,000 shares at both March 31, 2006 and
December 31, 2005Issued: 28,593,000 and 27,462,000 at March 31, 2006 and
December 31, 2005, respectivelyOutstanding: 27,616,000 and 27,144,000 shares at March 31,
2006 and December 31, 2005, respectively
    
    
    276
    
    
    
    274Additional paid-in capital
    
    
    114,534
    
    
    
    112,511Deferred compensation
    
    
    
    
    
    
    (1,231
    )Treasury stock: 977,000 and 318,000 shares at cost, at March 31, 2006 and December 31,
2005, respectively
    
    
    (34,257
    )
    
    
    (11,234
    )Cumulative translation adjustment
    
    
    3,532
    
    
    
    3,155Retained earnings
    
    
    123,694
    
    
    
    113,704Total stockholders equity
    
    
    207,779
    
    
    
    217,179Total liabilities and stockholders equity
    
    $
    362,977
    
    
    $
    353,699
  3




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Three months ended March 31,2006
    
    
    2005Revenue
    
    $
    169,139
    
    
    $
    150,758Cost of services
    
    
    136,234
    
    
    
    123,855Gross profit
    
    
    32,905
    
    
    
    26,903Selling, general and administrative
    
    
    15,185
    
    
    
    12,559Amortization
    
    
    610
    
    
    
    376Income from operations
    
    
    17,110
    
    
    
    13,968Interest income
    
    
    175
    
    
    
    265Interest expense
    
    
    (57
    )
    
    
    (38
    )Income before taxes
    
    
    17,228
    
    
    
    14,195Income tax expense
    
    
    7,238
    
    
    
    5,836Net income
    
    $
    9,990
    
    
    $
    8,359Earnings per share  basic
    
    $
    0.37
    
    
    $
    0.31Weighted average number of common shares  basic
    
    
    26,897
    
    
    
    26,894Earnings per share  diluted
    
    $
    0.36
    
    
    $
    0.30Weighted average number of common and common equivalent
shares  diluted
    
    
    28,023
    
    
    
    28,203
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Three months endedMarch 31,
    
    
    March 31,2006
    
    
    2005Net income
    
    $
    9,990
    
    
    $
    8,359Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    4,165
    
    
    
    3,333Non-cash revenue and other
    
    
    (231
    )
    
    
    (319
    )Loss on disposal of fixed assets
    
    
    41
    
    
    
    3Stock based compensation
    
    
    762
    
    
    
    264Deferred income taxes
    
    
    1,095
    
    
    
    260Tax benefit realized from the exercise of stock options
    
    
    
    
    
    
    979Changes in assets and liabilities:Accounts receivable
    
    
    (4,525
    )
    
    
    (4,883
    )Prepaid expenses and other current assets
    
    
    (157
    )
    
    
    (300
    )Accounts payable and accrued expenses
    
    
    3,690
    
    
    
    6,127Income taxes
    
    
    1,323
    
    
    
    1,895Deferred revenue
    
    
    13,767
    
    
    
    3,984Accrued rent
    
    
    (128
    )
    
    
    343Other assets
    
    
    10
    
    
    
    229Other current and long-term liabilities
    
    
    136
    
    
    
    642Net cash provided by operating activities
    
    
    29,938
    
    
    
    20,916Cash flows from investing activities:Additions to fixed assets, net of acquired amounts
    
    
    (7,177
    )
    
    
    (2,452
    )Proceeds from the disposal of fixed assets
    
    
    39
    
    
    
    Payments for acquisitions, net of cash acquired
    
    
    (580
    )
    
    
    (6,762
    )Net cash used in investing activities
    
    
    (7,718
    )
    
    
    (9,214
    )Cash flows from financing activities:Proceeds from the issuance of common stock
    
    
    1,865
    
    
    
    1,509Excess tax benefit from stock-based compensation
    
    
    628
    
    
    
    Purchases of treasury stock
    
    
    (23,023
    )
    
    
    Principal payments of long term debt
    
    
    (171
    )
    
    
    (199
    )Net cash (used in) provided by financing activities
    
    
    (20,701
    )
    
    
    1,310Effect of exchange rates on cash balances
    
    
    59
    
    
    
    (85
    )Net increase in cash and cash equivalents
    
    
    1,578
    
    
    
    12,927Cash and cash equivalents, beginning of period
    
    
    21,650
    
    
    
    42,472Cash and cash equivalents, end of period
    
    $
    23,228
    
    
    $
    55,399Supplemental cash flow informationCash payments of interest
    
    $
    60
    
    
    $
    42Cash payments of income taxes
    
    $
    4,064
    
    
    $
    2,806
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ITEM
1. D. Notes to Condensed Consolidated Financial Statements (Unaudited)
  Organization
  Basis of Presentation
   Segment Information
 Stock-Based Compensation
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Three monthsendedMarch 31, 2006Cost of services
    
    $
    83,000Selling, general and administrative
    
    
    679,000Stock-based compensation before tax
    
    
    762,000Income tax benefit
    
    
    198,000Net compensation expense
    
    
    564,000
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Three monthsendedMarch 31, 2006Basic earnings per share
    
    $
    (0.02)Diluted earnings per share
    
    $
    (0.02)
   Three monthsendedMarch 31, 2005Net income:As reported
    
    $
    8,359,000Add: Stock-based compensation expense included in
reported net income, net of related tax effects
    
    
    180,000Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (1,418,000
    )Pro forma
    
    $
    7,121,000Earnings per share-Basic:As reported
    
    $
    0.31Pro forma
    
    $
    0.26Earnings per share-Diluted:As reported
    
    $
    0.30Pro forma
    
    $
    0.25
  8




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Stock Options
  Three months endedMarch 31, 2006
    
    
    March 31, 2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected stock price volatility
    
    
    41.6
    %
    
    
    45.6
    %Risk free interest rate
    
    
    4.86
    %
    
    
    3.36
    %Expected life of options
    
    6.0 years
    
    6.0 yearsWeighted-average fair value per share
of options granted during the period
    
    $
    16.96
    
    
    $
    16.05
   WeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    AverageContractual
    
    
    Number of
    
    
    ExerciseLife in Years
    
    
    Shares
    
    
    PriceOutstanding at January 1, 2006
    
    
    5.5
    
    
    
    2,152,106
    
    
    $
    15.94Granted
    
    
    
    
    
    
    158,060
    
    
    
    35.34Exercised
    
    
    
    
    
    
    (114,496
    )
    
    
    12.09Forfeited or Expired
    
    
    
    
    
    
    (19,746
    )
    
    
    12.32Outstanding at March 31, 2006
    
    
    5.5
    
    
    
    2,175,924
    
    
    $
    17.59Exercisable at March 31, 2006
    
    
    4.9
    
    
    
    1,466,964
    
    
    $
    13.62
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WeightedNumber
    
    
    Averageof Shares
    
    
    Exercise PriceOutstanding at January 1, 2006
    
    
    861,506
    
    
    $
    19.68Granted
    
    
    158,060
    
    
    
    35.34Vested
    
    
    (306,836
    )
    
    
    13.49Forfeited or Expired
    
    
    (3,770
    )
    
    
    29.85Outstanding at March 31, 2006
    
    
    708,960
    
    
    $
    25.80
     Restricted Stock Awards
   WeightedNumber of
    
    
    AverageShares
    
    
    Fair ValueOutstanding at January 1, 2006
    
    
    93,100
    
    
    $
    21.44Granted
    
    
    38,665
    
    
    
    22.75Vested
    
    
    (7,600
    )
    
    
    23.60Forfeited or Expired
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    124,165
    
    
    $
    21.72
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Comprehensive Income
 For the three months ended March 31,2006
    
    
    2005Net income
    
    $
    9,990
    
    
    $
    8,359Foreign currency
translation
adjustments
    
    
    377
    
    
    
    (958
    )Comprehensive income
    
    $
    10,367
    
    
    $
    7,401
    Three months ended March 31, 2006Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic earnings per share:Income available to common
Stockholders
    
    $
    9,990,000
    
    
    
    26,897,000
    
    
    $
    0.37Effect of dilutive securities:Stock options and
Restricted Stock
    
    
    
    
    
    
    1,126,000Diluted earnings per share
    
    $
    9,990,000
    
    
    
    28,023,000
    
    
    $
    0.36
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Three months ended March 31, 2005Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic earnings per share:Income available to common
Stockholders
    
    $
    8,359,000
    
    
    
    26,894,000
    
    
    $
    0.31Effect of dilutive securities:Stock options and
Restricted Stock
    
    
    
    
    
    
    1,309,000Diluted earnings per share
    
    $
    8,359,000
    
    
    
    28,203,000
    
    
    $
    0.30
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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 issures;
    
    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 clains involving alleged incidents at our centers;
 13




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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
  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
    %
  14




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15




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Seasonality
 Results of Operations
  Three months endedMarch 31,2006
    
    
    2005Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    80.5
    
    
    
    82.2Gross profit
    
    
    19.5
    
    
    
    17.8Selling, general & administrative
    
    
    9.0
    
    
    
    8.3Amortization
    
    
    0.4
    
    
    
    0.2Income from operations
    
    
    10.1
    
    
    
    9.3Interest income
    
    
    0.1
    
    
    
    0.1Interest expense
    
    
    0.0
    
    
    
    0.0Income before income taxes
    
    
    10.2
    
    
    
    9.4Income tax provisions
    
    
    4.3
    
    
    
    3.9Net income
    
    
    5.9
    %
    
    
    5.5
    %
 Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005
 Revenue
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Gross Profit
   Selling, General and Administrative Expenses (SGA)
   17




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Amortization.
 Income from Operations
 Interest Income and Expense
 Income Tax Expense
 Liquidity and Capital Resources
   18




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Critical Accounting Policies and Estimates
  19




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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
       20




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ITEM 4. Controls and Procedures
 (a) Disclosure controls and procedures
   (b) Changes in internal control over financial reporting
  21




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PART II  OTHER INFORMATION
 
   
   
   Issuer Purchases of Equity SecuritiesTotal Number of
    
    
    MaximumShares
    
    
    Number ofPurchased as
    
    
    Shares that MayTotal
    
    
    Average
    
    
    Part of Publicly
    
    
    Yet BeNumber of
    
    
    Price
    
    
    Announced
    
    
    Purchased UnderShares
    
    
    Paid per
    
    
    Plans or
    
    
    the Plans orPeriod
    
    Purchased
    
    

Share
    
    
    Programs
    
    
    ProgramsJanuary 1-31, 2006
    
    
    
    
    
    $
    
    
    
    
    1,351,668
    
    
    
    1,148,332February 1- 28, 2006
    
    
    360,000
    
    
    
    35.55
    
    
    
    1,711,668
    
    
    
    788,332March 1-31,
2006
    
    
    298,709
    
    
    
    34.23
    
    
    
    2,010,377
    
    
    
    489,623Total
    
    
    658,709
 
   
   
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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.
 23




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SIGNATURE
    By:
    /s/ Elizabeth J. BolandElizabeth J. BolandChief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer) 24