##### 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 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 Number0-24699
 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
  (617) 673-8000
  Yes þ o
 Yes þ o
 o No þ




---



##### Table of Contents



FORM 10-Q
 TABLE
OF CONTENTS
 PageNumberPART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsA.
Unaudited Condensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004
    
    3B.
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months ended September 30, 2005 and 2004
    
    4C.
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2005 and 2004
    
    5D.
Unaudited Notes to Condensed Consolidated Financial Statements
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    10ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    16ITEM 4. Controls and Procedures
    
    16PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    18ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    18ITEM 3. Defaults Upon Senior Securities
    
    18ITEM 4. Submission of Matters to a Vote of Security Holders
    
    18ITEM 5. Other Information
    
    18ITEM 6. Exhibits
    
    18SIGNATURE
    
    18EX-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




---



##### Table of Contents



Bright Horizons Family Solutions, Inc.
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    30,344
    
    
    $
    42,472Accounts receivable, net
    
    
    29,132
    
    
    
    26,182Prepaid expenses and other current assets
    
    
    13,794
    
    
    
    11,204Prepaid income taxes
    
    
    2,246
    
    
    
    1,764Current deferred tax asset
    
    
    14,750
    
    
    
    12,986Total current assets
    
    
    90,266
    
    
    
    94,608Fixed assets, net
    
    
    119,446
    
    
    
    112,637Goodwill, net
    
    
    120,387
    
    
    
    72,987Other intangibles, net
    
    
    26,079
    
    
    
    12,747Non-current deferred tax asset
    
    
    2,515
    
    
    
    2,837Other assets
    
    
    2,074
    
    
    
    789Total assets
    
    $
    360,767
    
    
    $
    296,605LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt and
obligations due under capital leases
    
    $
    664
    
    
    $
    778Accounts payable and accrued expenses
    
    
    58,531
    
    
    
    51,956Deferred revenue, current portion
    
    
    45,004
    
    
    
    26,494Income tax payable
    
    
    599
    
    
    
    274Other current liabilities
    
    
    5,753
    
    
    
    3,287Total current liabilities
    
    
    110,551
    
    
    
    82,789Long-term debt and obligations due under
capital leases, net of current portion
    
    
    850
    
    
    
    1,321Accrued rent
    
    
    7,166
    
    
    
    4,902Other long-term liabilities
    
    
    5,787
    
    
    
    5,203Non-current deferred tax liability
    
    
    2,193
    
    
    
    __Deferred revenue, net of current portion
    
    
    15,943
    
    
    
    16,146Total liabilities
    
    
    142,490
    
    
    
    110,361Commitments 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
    
    
    
    268Additional paid-in capital
    
    
    111,686
    
    
    
    101,584Deferred compensation
    
    
    (1,466
    )
    
    
    (1,085
    )Cumulative translation adjustment
    
    
    3,923
    
    
    
    8,474Retained earnings
    
    
    103,861
    
    
    
    77,003Total stockholders equity
    
    
    218,277
    
    
    
    186,244Total liabilities and stockholders equity
    
    $
    360,767
    
    
    $
    296,605
  3




---



##### Table of Contents



Bright Horizons Family Solutions, Inc.
 
 Condensed Consolidated Statements of Income
 (in thousands, except per share data)
 (Unaudited)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    154,425
    
    
    $
    138,954
    
    
    $
    462,200
    
    
    $
    407,101Cost of services
    
    
    126,582
    
    
    
    116,025
    
    
    
    378,716
    
    
    
    340,230Gross profit
    
    
    27,843
    
    
    
    22,929
    
    
    
    83,484
    
    
    
    66,871Selling, general and administrative
    
    
    12,668
    
    
    
    10,991
    
    
    
    37,990
    
    
    
    32,270Amortization
    
    
    442
    
    
    
    354
    
    
    
    1,202
    
    
    
    798Income from operations
    
    
    14,733
    
    
    
    11,584
    
    
    
    44,292
    
    
    
    33,803Interest income
    
    
    592
    
    
    
    122
    
    
    
    1,276
    
    
    
    299Interest expense
    
    
    (36
    )
    
    
    (50
    )
    
    
    (123
    )
    
    
    (132
    )Income before tax
    
    
    15,289
    
    
    
    11,656
    
    
    
    45,445
    
    
    
    33,970Income tax provision
    
    
    6,251
    
    
    
    4,877
    
    
    
    18,587
    
    
    
    14,210Net income
    
    $
    9,038
    
    
    $
    6,779
    
    
    $
    26,858
    
    
    $
    19,760Earnings per share  basic
    
    $
    0.33
    
    
    $
    0.25
    
    
    $
    0.99
    
    
    $
    0.75Weighted average shares  basic
    
    
    27,279
    
    
    
    26,600
    
    
    
    27,078
    
    
    
    26,428Earnings per share  diluted
    
    $
    0.32
    
    
    $
    0.24
    
    
    $
    0.95
    
    
    $
    0.71Weighted average shares  diluted
    
    
    28,557
    
    
    
    27,882
    
    
    
    28,380
    
    
    
    27,758
  4




---



##### Table of Contents



Bright Horizons Family Solutions, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (Unaudited)
 Nine months endedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    26,858
    
    
    $
    19,760Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    10,377
    
    
    
    9,106Stock-based compensation expense
    
    
    743
    
    
    
    675Deferred income taxes
    
    
    (368
    )
    
    
    (874
    )Tax benefit realized from the exercise of stock options
    
    
    2,927
    
    
    
    1,729Loss on disposal of fixed assets
    
    
    18
    
    
    
    48Other
    
    
    (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
    
    
    
    3,380Income taxes
    
    
    (116
    )
    
    
    2,068Deferred revenue
    
    
    9,570
    
    
    
    1,077Accrued rent
    
    
    376
    
    
    
    49Other assets
    
    
    386
    
    
    
    (115
    )Other current and long-term liabilities
    
    
    (4,119
    )
    
    
    (41
    )Net cash provided by operating activities
    
    
    48,847
    
    
    
    31,703Cash flows from investing activities:Additions to fixed assets, net of acquired amounts
    
    
    (9,794
    )
    
    
    (7,746
    )Proceeds from the disposal of fixed assets
    
    
    
    
    
    
    46Payments 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
    
    
    
    4,188Principal payments of long term debt and
obligations due under capital leases
    
    
    (577
    )
    
    
    (531
    )Net cash provided by financing activities
    
    
    5,480
    
    
    
    3,657Effect of exchange rates on cash balances
    
    
    (369
    )
    
    
    (30
    )Net (decrease) increase in cash and cash equivalents
    
    
    (12,128
    )
    
    
    8,384Cash and cash equivalents, beginning of period
    
    
    42,472
    
    
    
    33,899Cash and cash equivalents, end of period
    
    $
    30,344
    
    
    $
    42,283Supplemental cash flow information:Cash payments of interest
    
    
    115
    
    
    
    124Cash payments of income taxes
    
    
    16,482
    
    
    
    11,184
  5




---



##### Table of Contents



ITEM
1.D. Unaudited Notes to Condensed Consolidated Financial Statements
 1. The Company and Basis of Presentation
 Organization
  Basis of Presentation
  Stock Split
 Segment Information
 Stock-Based Compensation
  6




---



##### Table of Contents



Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands except per share data)Net income:As reported
    
    $
    9,038
    
    
    $
    6,779
    
    
    $
    26,858
    
    
    $
    19,760Add: Stock-based compensation
expense included in reported net
income, net of related tax
effects
    
    
    147
    
    
    
    252
    
    
    
    479
    
    
    
    441Deduct: 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
    
    
    $
    18,074Earnings
per shareBasic:As reported
    
    $
    0.33
    
    
    $
    0.25
    
    
    $
    0.99
    
    
    $
    0.75Pro forma
    
    $
    0.32
    
    
    $
    0.23
    
    
    $
    0.88
    
    
    $
    0.68Earnings
per shareDiluted:As reported
    
    $
    0.32
    
    
    $
    0.24
    
    
    $
    0.95
    
    
    $
    0.71Pro forma
    
    $
    0.31
    
    
    $
    0.22
    
    
    $
    0.84
    
    
    $
    0.65
  Three Months Ended September 30,
    

Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Expected 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 yearsWeighted-average fair value
per share of options granted
    
    $
    19.29
    
    
    No grants
    
    $
    16.78
    
    
    $
    17.44
 7




---



##### Table of Contents



Comprehensive Income
 Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    

    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    9,038
    
    
    $
    6,779
    
    
    $
    26,858
    
    
    $
    19,760Foreign currency translation adjustments
    
    
    (1,115
    )
    
    
    181
    
    
    
    (4,551
    )
    
    
    318Comprehensive income
    
    $
    7,923
    
    
    $
    6,960
    
    
    $
    22,307
    
    
    $
    20,078
 Recently
Issued Accounting Pronouncements 
  Reclassifications

 2. Acquisitions
    3. Earnings per Share
  8




---



##### Table of Contents



Three months ended September 30,2005
    
    
    2004Earnings
    
    
    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
    
    
    $
    0.25Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,278
    
    
    
    
    
    
    
    
    
    
    
    1,282Diluted earnings per share
    
    $
    9,038
    
    
    
    28,557
    
    
    $
    0.32
    
    
    $
    6,779
    
    
    
    27,882
    
    
    $
    0.24
 Nine months ended September 30,2005
    
    
    2004Earnings
    
    
    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
    
    
    $
    0.75Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,302
    
    
    
    
    
    
    
    
    
    
    
    1,330Diluted earnings per share
    
    $
    26,858
    
    
    
    28,380
    
    
    $
    0.95
    
    
    $
    19,760
    
    
    
    27,758
    
    
    $
    0.71
  4. Commitments and Contingencies
    9




---



##### Table of Contents



ITEM 2. Managements 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
Companys 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 Companys
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




---



##### Table of Contents



Executive Summary and Discussion
 Fortune 500 Working Mother
  Industry Classification
    
    Percentage of CentersConsumer
    
    
    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
    %
    11




---



##### Table of Contents



Seasonality
 Recent Developments
 Results of Operations
  12




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    82.0
    
    
    
    83.5
    
    
    
    81.9
    
    
    
    83.6Gross profit
    
    
    18.0
    
    
    
    16.5
    
    
    
    18.1
    
    
    
    16.4Selling, general & administrative
    
    
    8.2
    
    
    
    7.9
    
    
    
    8.2
    
    
    
    7.9Amortization
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.2Income from operations
    
    
    9.5
    
    
    
    8.3
    
    
    
    9.6
    
    
    
    8.3Interest expense
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Interest income
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.0Income before income taxes
    
    
    9.9
    
    
    
    8.4
    
    
    
    9.8
    
    
    
    8.3Income tax provisions
    
    
    4.0
    
    
    
    3.5
    
    
    
    4.0
    
    
    
    3.4Net 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 .
 Gross Profit
  Selling, General and Administrative Expenses (SGA)
 13




---



##### Table of Contents



Amortization .
 Income from Operations .
 Interest Income
 Interest Expense .
 Income Tax Expense .
 Liquidity and Capital Resources
  14




---



##### Table of Contents



Recently Issued Accounting Pronouncements
   15




---



##### Table of Contents



Critical Accounting Policies and Estimates
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
     
 ITEM 4. Controls and Procedures
 (a) Disclosure controls and procedures
   16




---



##### Table of Contents





(b) Changes in internal control over financial reporting







    
    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.





    
    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.






(c) Limitation on the effectiveness of internal control over financial reporting




17




---



##### Table of Contents



PART II  OTHER INFORMATION
 
  
  
  
  
  
  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
 
 SIGNATURE
   BRIGHT HORIZONS FAMILY SOLUTIONS, INC.By: /s/ Elizabeth J. BolandElizabeth J. BolandChief Financial Officer(Duly Authorized Officer and PrincipalFinancial and Accounting Officer)
 18