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UNITED STATES
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, 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
    
    62-1742957(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 200 Talcott Avenue South
Watertown, Massachusetts 02472
(Address of principal executive offices) (617) 673-8000
(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 o. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).Yes x      No o Indicate the number of shares outstanding of each of the registrants classes of common stock as of
the latest practicable date: 27,077,012 shares of common stock, $.01 par value, at May 5, 2005.




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FORM 10-Q
INDEX PageNumberPART I. FINANCIAL INFORMATIONITEM 1. Consolidated Financial StatementsA. Consolidated Balance Sheets at March 31, 2005
(Unaudited) and December 31, 2004
    
    
    3B. Unaudited Consolidated Statements of Income for the
Three Months ended March 31, 2005 and 2004
    
    
    4C. Unaudited Consolidated Statements of Cash Flows for
the Three Months ended March 31, 2005 and 2004
    
    
    5D. Unaudited Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18ITEM 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    21ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21ITEM 3. Defaults Upon Senior Securities
    
    
    21ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    21ITEM 5. Other Information
    
    
    21ITEM 6. Exhibits
    
    
    21SIGNATURE
    
    
    22EX-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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PART I. FINANCIAL INFORMATION 
 ITEM 1. Consolidated Financial Statements Bright Horizons Family Solutions, Inc. 
   March 31,
    
    
    December 31,2005
    
    
    2004ASSETS
    
    (Unaudited)Current Assets:Cash and cash equivalents
    
    $
    55,399
    
    
    $
    42,472Accounts receivable, net
    
    
    30,988
    
    
    
    26,182Prepaid expenses and other current assets
    
    
    11,458
    
    
    
    11,204Prepaid income taxes
    
    
    
    
    
    
    1,764Current deferred tax asset
    
    
    12,362
    
    
    
    12,986Total current assets
    
    
    110,207
    
    
    
    94,608Fixed assets, net
    
    
    112,204
    
    
    
    112,637Goodwill, net
    
    
    77,543
    
    
    
    72,987Other intangibles, net
    
    
    13,052
    
    
    
    12,747Non-current deferred tax asset
    
    
    3,175
    
    
    
    2,837Other assets
    
    
    1,028
    
    
    
    789Total assets
    
    $
    317,209
    
    
    $
    296,605LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    750
    
    
    $
    778Accounts payable and accrued expenses
    
    
    58,085
    
    
    
    51,956Deferred revenue, current portion
    
    
    30,761
    
    
    
    26,494Income tax payable
    
    
    398
    
    
    
    274Other current liabilities
    
    
    3,809
    
    
    
    3,287Total current liabilities
    
    
    93,803
    
    
    
    82,789Long term debt, net of current portion
    
    
    1,146
    
    
    
    1,321Accrued rent
    
    
    5,213
    
    
    
    4,902Other long-term liabilities
    
    
    5,295
    
    
    
    5,203Deferred revenue, net of current portion
    
    
    15,354
    
    
    
    16,146Total liabilities
    
    
    120,811
    
    
    
    110,361Stockholders equity:Preferred stock: 5,000,000 shares authorized, none issued or outstandingCommon stock: $.01 par valueAuthorized: 50,000,000 shares at both March 31, 2005
and December 31, 2004Issued and outstanding: 27,067,000 and 26,870,000
shares at March 31, 2005 and December 31, 2004,
respectively
    
    
    270
    
    
    
    268Additional paid-in capital
    
    
    105,159
    
    
    
    101,584Deferred compensation
    
    
    (1,909
    )
    
    
    (1,085
    )Cumulative translation adjustment
    
    
    7,516
    
    
    
    8,474Retained earnings
    
    
    85,362
    
    
    
    77,003Total stockholders equity
    
    
    196,398
    
    
    
    186,244Total liabilities and stockholders equity
    
    $
    317,209
    
    
    $
    296,605
 The accompanying notes are an integral part of the consolidated financial statements. 3




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Bright Horizons Family Solutions, Inc. 
  
 Three months ended March 31,2005
    
    
    2004Revenue
    
    $
    150,758
    
    
    $
    131,347Cost of services
    
    
    123,855
    
    
    
    110,406Gross profit
    
    
    26,903
    
    
    
    20,941Selling, general and administrative
    
    
    12,559
    
    
    
    10,293Amortization
    
    
    376
    
    
    
    198Income from operations
    
    
    13,968
    
    
    
    10,450Interest income
    
    
    265
    
    
    
    79Interest expense
    
    
    (38
    )
    
    
    (44
    )Income before taxes
    
    
    14,195
    
    
    
    10,485Income tax expense
    
    
    5,836
    
    
    
    4,382Net income
    
    $
    8,359
    
    
    $
    6,103Earnings per share  basic
    
    $
    0.31
    
    
    $
    0.23Weighted average number of common shares  basic
    
    
    26,894
    
    
    
    26,251Earnings per share  diluted
    
    $
    0.30
    
    
    $
    0.22Weighted average number of common and common
equivalent shares  diluted
    
    
    28,203
    
    
    
    27,643
 The accompanying notes are an integral part of the consolidated financial statements. 4




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Bright Horizons Family Solutions, Inc. 
  
 Three months endedMarch 31,
    
    
    March 31,2005
    
    
    2004Net income
    
    $
    8,359
    
    
    $
    6,103Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,333
    
    
    
    2,884(Gain) loss on disposal of fixed assets
    
    
    3
    
    
    
    (7
    )Stock based compensation
    
    
    264
    
    
    
    109Deferred income taxes
    
    
    260
    
    
    
    (1,325
    )Tax benefit realized from the exercise of stock options
    
    
    979
    
    
    
    Other
    
    
    (319
    )
    
    
    18Changes in assets and liabilities:Accounts receivable
    
    
    (4,883
    )
    
    
    4,315Prepaid expenses and other current assets
    
    
    (300
    )
    
    
    438Accounts payable and accrued expenses
    
    
    6,127
    
    
    
    (516
    )Income taxes
    
    
    1,895
    
    
    
    2,194Deferred revenue
    
    
    3,984
    
    
    
    49Accrued rent
    
    
    343
    
    
    
    (11
    )Other assets
    
    
    229
    
    
    
    31Other current and long-term liabilities
    
    
    642
    
    
    
    322Net cash provided by operating activities
    
    
    20,916
    
    
    
    14,604Cash flows from investing activities:Purchases of fixed assets
    
    
    (2,452
    )
    
    
    (3,272
    )Proceeds from the disposal of fixed assets
    
    
    
    
    
    
    43Payments for acquisitions, net of cash acquired
    
    
    (6,762
    )
    
    
    (330
    )Net cash used in investing activities
    
    
    (9,214
    )
    
    
    (3,559
    )Cash flows from financing activities:Proceeds from the issuance of common stock
    
    
    1,509
    
    
    
    1,695Principal payments of long term debt
    
    
    (199
    )
    
    
    (166
    )Net cash provided by financing activities
    
    
    1,310
    
    
    
    1,529Effect of exchange rates on cash balances
    
    
    (85
    )
    
    
    11Net increase in cash and cash equivalents
    
    
    12,927
    
    
    
    12,585Cash and cash equivalents, beginning of period
    
    
    42,472
    
    
    
    33,899Cash and cash equivalents, end of period
    
    $
    55,399
    
    
    $
    46,484Supplemental cash flow information:Cash payments of interest
    
    $
    42
    
    
    $
    42Cash payments of income taxes
    
    $
    2,806
    
    
    $
    3,498
 The accompanying notes are an integral part of the consolidated financial statements. 5




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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. and CorporateFamily Solutions,
Inc. on July 24, 1998 (the Merger). The Company provides workplace services for employers and
families including early care and education and strategic work/life consulting throughout the
United States, Canada, Ireland and the United Kingdom. The Company operates its early care and education centers under various types of arrangements,
which generally can be classified in two forms: (i) the
management (cost plus) model, where the Company
manages a work-site early care and education center under a cost-plus arrangement, typically for
a single employer and (ii) the profit and loss (P&L) model which can be either (a)
employer-sponsored, where the Company typically provides early care and educational services on
a priority enrollment basis for employees of a single employer sponsor or (b) a lease model,
where the Company may provide priority early care and education to the employees of multiple
employers located within a real estate developers property or the community at large. Basis of Presentation The accompanying financial statements have been prepared by the Company
in accordance with the accounting policies described in the Companys audited financial
statements included in the Companys Annual Report on Form 10-K for the year ended December 31,
2004, 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 for a fair statement of its financial
position as of March 31, 2005, and the results of its operations and cash flows for the
three-month periods ended March 31, 2005 and 2004, and are of a normal and recurring nature.
The results of operations for interim periods are not necessarily indicative of the operating
results to be expected for the full year. Stock Split On
February 9, 2005, the Board of Directors approved a 2-for-1
stock split which was paid on March 21, 2005 to stockholders of record as of March 4, 2005. All prior share and per
share amounts have been restated to reflect the stock split. Segment Information As of March 31, 2005, the Company operates in one segment, providing
services to employers and families including early care and education and work/life consulting
and generates in excess of 90% of revenue and operating profit in the United States.
Additionally, no single customer accounts for more than 10% of the Companys revenue. 6




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Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation as amended by
SFAS No. 148 Accounting for Stock-Based Compensation Transition and Disclosure, an amendment
of SFAS No. 123 encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to continue to
account for employee stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. The Company granted 54,700 shares of restricted common stock during the quarter ended March 31,
2005. These shares were accounted for under the intrinsic value method as prescribed in APB
Opinion No. 25. Stock-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as expense over vesting periods of three years. The
restricted stock grants were valued at $1,088,000 of which approximately $30,000 was recognized
as compensation expense during the quarter ended March 31, 2005. In addition, the Company also
recognized $234,000 and $109,000 in compensation expense during the quarters ended March 31,
2005 and 2004, respectively, related to existing equity awards for which compensation expense
must be recognized. At March 31, 2005 the unrecognized amounts of all awards totaled $1.9
million and is recorded as deferred compensation. Under APB Opinion No. 25, no compensation cost related to employee stock options has been
recognized because options are granted with exercise prices equal to or greater than the fair
market value at the date of grant. The Company accounts for options granted to non-employees
using the fair value method, in accordance with the provisions of SFAS No. 123, as amended by
SFAS No. 148. Had compensation cost for the stock option plans been determined based on the
fair value at the grant date for awards in 1995 through March 31, 2005, consistent with the
provisions of SFAS No. 123, the Companys net income and earnings per share would have been
reduced to the following pro forma amounts for the quarters ended March 31, 2005 and 2004: Three months endedMarch 31,2005
    
    
    2004Net income:As reported
    
    $
    8,359,000
    
    
    $
    6,103,000Add: Stock-based compensation expense
included in reported net income, net of
related tax effects
    
    
    180,000
    
    
    
    65,000Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    (1,418,000
    )
    
    
    (647,000
    )Pro forma net income
    
    $
    7,121,000
    
    
    $
    5,521,000Earnings per share-Basic:As reported
    
    $
    0.31
    
    
    $
    0.23Pro forma
    
    $
    0.26
    
    
    $
    0.21Earnings per share-Diluted:As reported
    
    $
    0.30
    
    
    $
    0.22Pro forma
    
    $
    0.25
    
    
    $
    0.20
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The fair value of each option on its date of grant has been estimated for pro forma purposes
using the Black-Scholes option-pricing model using the following weighted average assumptions: Three months endedMarch 31,2005
    
    
    2004Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected stock price volatility
    
    
    45.6
    %
    
    
    46.1
    %Risk free interest rate
    
    
    3.36
    %
    
    
    2.83
    %Expected life of options
    
    6.0 years
    
    6.1 yearsWeighted-average fair
value per share of options
granted during the period
    
    $
    16.05
    
    
    $
    11.07
 Comprehensive Income Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources. The only components of comprehensive income reported by the Company are net income and
foreign currency translation adjustments. For the three months endedMarch 31,2005
    
    
    2004Net income
    
    $
    8,359
    
    
    $
    6,103Foreign currency translation adjustments
    
    
    (958
    )
    
    
    556Comprehensive income
    
    $
    7,401
    
    
    $
    6,659
 Recently Issued Accounting Pronouncements-In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets-an amendment of Accounting Principles Board (APB) Opinion No.
29, to eliminate the exception for nonmonetary exchanges of similar productive assets and
replace it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in all interim periods beginning after June 15, 2005, with early application
permitted for exchanges beginning after November 2004. The Company does not believe that the
adoption of this Statement will have a material impact on the Companys consolidated financial
position or results of operations. In December 2004, the FASB issued SFAS No. 123R, which supersedes SFAS No. 123. This Statement
requires companies to measure and recognize compensation expense for all stock-based payments to
employees and non-employees at fair value. Stock-based payments include stock option grants,
restricted stock grants and other equity based awards. The Company grants options to purchase
common stock to 8




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some of its employees and directors at prices equal to the market value of the stock on the
dates the options were granted, as well as restricted stock. SFAS No. 123R is effective for all
fiscal years beginning after June 15, 2005. Early adoption is permitted, but not required. The
Company has not yet adopted this pronouncement and is currently evaluating the expected impact
that the adoption of SFAS No. 123R will have on its consolidated financial position, results of
operations and cash flows. Reclassifications-Certain amounts in the prior periods financial statements have been
reclassified to conform with the current periods presentation. 2. Acquisitions During the quarter ended March 31, 2005, the Company purchased the assets of a domestic
multi-site child care and early education operator and agreed to pay aggregate consideration of
$7.0 million. This transaction for which the Company paid $6.8 million in cash resulted in a
preliminary allocation to goodwill of $5.3 million and other intangible assets subject to
amortization of $935,000. The above acquisitions and the operating results of the acquired
business have been included in the Companys consolidated results of operations from the
respective dates of acquisition. These preliminary estimates are based on an allocation of
purchase prices and the estimated fair value of the assets and liabilities acquired at the date
of acquisition. The acquisition is not material to the Companys consolidated financial position
or results of operation, and therefore no pro forma information has been presented. 3. Earnings Per Share Earnings per share has been calculated in accordance with SFAS No. 128 Earnings per Share,
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. The following tables present information necessary to calculate earnings per share: Three months ended March 31, 2005(in thousands, except per share data)Earnings
    
    
    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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Three months ended March 31, 2004(in thousands, except per share data)Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic earnings per share:Income available to common
Stockholders
    
    $
    6,103,000
    
    
    
    26,251,000
    
    
    $
    0.23Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,392,000Diluted earnings per share
    
    $
    6,103,000
    
    
    
    27,643,000
    
    
    $
    0.22
 The weighted average number of shares excluded from the above calculations for the three months
ended March 31, 2005 and 2004 were approximately 103,000 and 1,000, respectively, as their
effect would be anti-dilutive. For the three-month periods ended March 31, 2005 and 2004, the
Company had no warrants or preferred stock outstanding. 4. Commitments and Contingencies The Company self-insures a portion of its workers compensation and medical insurance plans.
While management believes that the amounts accrued for these obligations is sufficient, any
significant increase in the number of claims and costs associated with claims made under these
plans could have a material adverse effect on the Companys financial position or results of
operations. The Company is a defendant in certain legal matters in the ordinary course of business.
Management believes the resolution of such legal matters will not have a material effect on the
Companys financial condition or results of operations. 10




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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; 11




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
    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. Executive Summary and Discussion Bright Horizons is a leading provider of workplace services for employers and families,
including early care and education and strategic work/life consulting. As of March 31, 2005,
the Company managed 577 early care and education centers, with over 50 early care and education
centers under development. The Company has the capacity to serve approximately 64,000 children
in 40 states, the District of Columbia, Canada, Ireland and the United Kingdom, and has
partnerships with many leading employers, including 80 Fortune 500companies and over 50% of
Working MotherMagazines 100 Best Companies for Working Mothers. The Companys 482 North
American centers average 122 capacity per location, while the 95 centers based in the UK and
Ireland average approximately 54 capacity per location. At March 31, 2005, approximately 60% of
the Companys centers were profit and loss (P&L) models and 40% were management (cost plus)
models. The Company seeks to cluster centers in geographic areas to enhance operating
efficiencies and to create a leading market presence. 12




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The Company operates centers for a diversified group of clients. At March 31, 2005, the
Companys early care and education centers were affiliated with the following industries: Percentage ofIndustry Classification
    
    CentersConsumer
    
    
    5
    %Financial Services
    
    
    15
    %Government and Education
    
    
    15
    %Healthcare
    
    
    15
    %Industrial/Manufacturing
    
    
    10
    %Office Park Consortiums
    
    
    25
    %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 improvement;
maintaining its competitive advantage as the employer of choice in its field and continuing the
high quality of its programs and customer satisfaction. The Company achieved both revenue and net income growth in the quarter ended March 31, 2005 by
executing on its growth strategy to add centers for new and existing clients, to expand service
offerings to clients, to pursue strategic acquisitions and to assume the management of existing
child care centers. The alignment of key demographic, social and workplace trends combined with
an overall under supply of quality childcare options for working families has continued to fuel
strong interest in the Companys services. General economic conditions and the business climate
in which individual clients operate remain the largest variables in terms of future performance.
These variables impact client capital and operating spending budgets, industry specific sales
leads and the overall sales cycle, as well as labor markets and wage rates as competition for
human capital fluctuates. Specifically, the Company achieved revenue growth of approximately 15% for the quarter ended
March 31, 2005 as compared to the same period in 2004. The revenue growth was principally due to
the growth in the number of centers the Company manages, additional enrollment in ramping as
well as mature centers, and price increases of 4-5%. Revenue growth reflects the addition of 62
centers since March 31, 2004, through a combination of organic growth, additional services for
existing clients, transitions of management of existing programs and acquisitions. The Company
added 17 centers during the quarter ended March 31, 2005, including the acquisition of eleven
centers in the Denver, Colorado metropolitan area. Although no centers closed in the first
quarter of 2005, the Company expects closures to approximate historic levels of 12  15 centers
in 2005. A key element of the growth 13




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strategy is expanding relationships with existing clients, and at March 31, 2005, the Company
served a total of 45 multi-site clients at 222 locations. Income from operations grew by $3.5 million and as a percentage of revenue improved from 8.0%
for the quarter ended March 31, 2004 to 9.3% in the first quarter of 2005. In addition, net
income grew by $2.3 million for the quarter ended March 31, 2005 as compared to the first
quarter of 2004. The improvement can be attributed to pacing tuition increases ahead of wage
increases, careful management of personnel costs, capacity utilization increases of 1-2% year
over year in the mature center base and the addition of mature centers through acquisitions and
transitions of management. The improvement in operating margin is also attributable to a
slightly heavier weighting of transitions and acquisitions in the new centers added since the
first quarter of 2004, which typically contribute immediately to the Companys results as they
are at mature operating levels. The opportunity to achieve additional margin improvement in the
future will be dependent upon the Companys ability to achieve the following: continued
incremental enrollment growth in our mature and ramping classes of centers; annual tuition
increases above the levels of annual average wage increases; careful cost management; and the
successful integration of acquisitions and transitions of management to our network of centers. Finally, one of the Companys guiding principals is its focus on sustaining the high quality of
its services and programs and at the same time achieving revenue growth and increasing operating
profitability. The Companys future financial success will be dependent on meeting both of these
goals. Nearly 80% of the Companys eligible domestic early care and education centers are
accredited by the National Association for the Education of Young Children (NAEYC). The
Company also operates high quality programs to achieve the accreditation standards of the Office
of Standards in Education (OFSTED) and National Child Nursery Association (NCNA) care
standards in the United Kingdom and Ireland, respectively. Seasonality. The Companys business is subject to seasonal and quarterly fluctuations. Demand
for early care and education services has historically decreased during the summer months.
During this season, families are often on vacation or have alternative child care arrangements.
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 including enrollment and staffing fluctuations, the number and
timing of new center openings and/or acquisitions, the length of time required for new centers
to achieve profitability, center closings, refurbishment or relocation, the model mix (P&L vs.
cost plus) of new and existing centers, the timing and level of sponsorship payments,
competitive factors and general economic conditions. 14




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Results of Operations The following table sets forth certain statement of operations data as a percentage of revenue
for the three-month periods ended March 31, 2005 and 2004: Three months endedMarch 31,2005
    
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    82.2
    
    
    
    84.1Gross profit
    
    
    17.8
    
    
    
    15.9Selling, general & administrative
    
    
    8.3
    
    
    
    7.8Amortization
    
    
    0.2
    
    
    
    0.1Income from operations
    
    
    9.3
    
    
    
    8.0Interest income
    
    
    0.1
    
    
    
    0.0Interest expense
    
    
    0.0
    
    
    
    0.0Income before income taxes
    
    
    9.4
    
    
    
    8.0Income tax provisions
    
    
    3.9
    
    
    
    3.4Net income
    
    
    5.5
    %
    
    
    4.6
    %
 Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004 Revenue. Revenue increased $19.5 million, or 14.8%, to $150.8 million for the three months
ended March 31, 2005 from $131.3 million for the three months ended March 31, 2004. The growth
in revenues is primarily attributable to the net addition of 62 centers since March 31, 2004,
which resulted in a 7% increase in overall capacity, modest growth in the existing base of
centers and average tuition increases of approximately 4-5% at existing centers. Gross Profit. Cost of services consists of center operating expenses, including payroll and
benefits for center personnel, facilities costs, which include depreciation, supplies and other
expenses incurred at the child care and early education center level. Gross profit increased
$6.0 million, or 28.5%, to $26.9 million for the three-month period ended March 31, 2005 from
$20.9 million for the three months ended March 31, 2004. As a percentage of revenue, gross
profit increased to 17.8% for the three months ended March 31, 2005 compared to 15.9% for the
three months ended March 31, 2004. The increase in gross profit margin for the three-month period ended March 31, 2005 compared to
the same period in 2004 resulted from: first, modest improvements in enrollment which drive
operating efficiencies at the center level as the fixed costs are absorbed over a broader
tuition base; second, contributions from new cost plus centers, acquisitions and transitions of
management, which enter the network of centers at mature operating levels, and third, annual
tuition rate increases ahead of wage increases coupled with careful cost management at existing
programs. The Companys operations are subject to seasonal variations, which typically result
from higher enrollment during the first and second quarter of each calendar year (especially
amongst the older age groups) and lower enrollment during the third 15




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calendar quarter as children transition to school. This frequently results in lower gross
profit margins during the second half of the calendar year as compared to the first and second
calendar quarters. Selling, General and Administrative Expenses. Selling, general and administrative expenses
(SGA) consist of regional and division management personnel, corporate management and
administrative functions, and business development expenses. SGA increased $2.3 million, or 22%,
to $12.6 million for the three months ended March 31, 2005 from $10.3 million for the three
months ended March 31, 2004. As a percentage of revenue, SGA increased to 8.3% for the first
quarter of 2005 compared to 7.8% for the same period in 2004. The dollar increase in SGA in the first quarter of 2005 compared to the same 2004 period is
primarily related to: increased spending on regional and divisional operations management,
increased costs of compliance, as well as corporate and administrative personnel necessary to
support existing business and new growth opportunities. The percentage increase in SGA for the
comparative quarters is principally attributable to costs incurred for compliance efforts for
the Sarbanes-Oxley Act of 2002 (SOX). Specifically, the Company recognized incremental
expenses of approximately $400,000 in the first quarter of 2005 arising from spending for 2004
SOX compliance. Although the Company anticipates that the majority of costs incurred during the
initial SOX implementation year in 2004 will continue, the Company expects to leverage overhead
spending across its growing base of business, and to modestly reduce SGA as a percentage of
revenue for the remainder of the year. Amortization.Amortization expense on intangible assets other than goodwill totaled $376,000 for
the three-month period ended March 31, 2005, as compared to $198,000 in the same period for
2004. The increase relates to the addition of certain trade names, non-compete agreements,
customer relationships and contract rights arising from acquisitions the Company completed in
the second half of 2004 and in 2005, which are subject to amortization. The Company anticipates
amortization expense to approximate $1.7 million on an annualized basis in 2005. Income from Operations. Income from operations totaled $14.0 million for the three- month period
ended March 31, 2005, an increase of $3.5 million, or 33.7%, from $10.5 million in the same
period for 2004. This increase is primarily the result of the indicated revenue and gross margin
improvements, offset somewhat by higher SGA expenses. Interest Income. Interest income totaled $265,000 for the three-month period ended March 31,
2005, an increase of $186,000, or 235.4%, from $79,000 in the same period for 2004. This
increase is attributable to increased average investment yields and higher levels of invested
cash. Interest Expense. Interest expense totaled $38,000 for the three-month period ended March 31,
2005, a decrease of $6,000, or 13.6%, from $44,000 in the same period for 2004. The decrease is
attributable to lower interest expense incurred on lower levels of outstanding debt. 16




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Income Tax Expense. The Companys effective income tax rate was approximately 41.1% for the
three-month period ended March 31, 2005 as compared to an effective income tax rate of 41.8% for
the same period in 2004. Liquidity and Capital Resources The Companys primary cash requirements are the ongoing operations of its existing early care
and education centers and the addition of new centers through development or acquisition. The
Companys primary sources of liquidity have been cash flow from operations and existing cash
balances, which were $55.4 million at March 31, 2005. The Companys cash balances are
supplemented by borrowings available under the Companys $25 million line of credit. There are
currently no amounts outstanding on the line of credit. The Company had a working capital
surplus of $16.4 million as of March 31, 2005 and a working capital surplus of $11.8 million at
December 31, 2004. The Company anticipates that it will continue to generate positive cash
flows from operating activities for the remainder of 2005 and that the cash generated will
principally be utilized to fund ongoing operations of its new and existing early care and
education centers, and will be sufficient to meet the Companys financial obligations. Cash provided from operations was $20.9 million for the three-month period ended March 31, 2005,
as compared to cash provided from operations of $14.6 million for the three-month period ended
March 31, 2004. The increase in cash provided from operations is primarily the result of
increases in net income, an increase in deferred revenue balances and an increase in accounts
payable and accrued expense balances primarily related to personnel costs (which are of a normal
and recurring nature) for the three-month period ended March 31, 2005 as compared to the same
period in 2004. These amounts were offset by an increase in the Companys balances in accounts
receivable. Cash used in investing activities totaled $9.2 million for the three-month period ended March
31, 2005, compared to $3.6 million in the corresponding period in 2004. Fixed asset additions
totaled $2.5 million in 2005, with $1.3 million related to new early care and education centers
and the remainder being primarily related to the refurbishment of early care and education
centers. Cash paid for acquisitions totaled $6.8 million for the first quarter of 2005 compared
to $330,000 in the same period in 2004. Cash provided by financing activities totaled $1.3 million for the three-month period ended
March 31, 2005 as compared to $1.5 million in cash provided by financing activities for the
three-month period ended March 31, 2004. The Company received $1.5 million for stock option
exercises in the three-month period ended March 31, 2005, as compared to $1.7 million in the
same period in 2004. Management believes that funds provided by operations and the Companys existing cash and cash
equivalent balances will be adequate to meet planned operating and capital expenditure needs for
at least the next 12 months. However, if the Company were to make any significant
acquisition(s) or investments in the purchase of facilities for new or existing early care and
education centers, it may be necessary for the Company to obtain additional debt or equity
financing. There can be no assurance 17




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that the Company would be able to obtain such financing on reasonable terms, if at all. Recently Issued Accounting Pronouncements In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets-an amendment of
Accounting Principles Board (APB) Opinion No. 29, to eliminate the exception for nonmonetary
exchanges of similar productive assets and replace it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The provisions of this Statement are
effective for nonmonetary asset exchanges occurring in all interim periods beginning after June
15, 2005, with early application permitted for exchanges beginning after November 2004. The
Company does not believe that the adoption of this Statement will have a material impact on the
Companys consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R, which supersedes SFAS No. 123. This Statement
requires companies to measure and recognize compensation expense for all stock-based payments to
employees and non-employees at fair value. Stock-based payments include stock option grants,
restricted stock grants and other equity based awards. The Company grants options to purchase
common stock to some of its employees and directors at prices equal to the market value of the
stock on the dates the options were granted, as well as restricted stock. SFAS No. 123R is
effective for all fiscal years beginning after June 15, 2005. Early adoption is permitted, but
not required. The Company has not yet adopted this pronouncement and is currently evaluating the
expected impact that the adoption of SFAS No. 123R will have on its consolidated financial
position, results of operations and cash flows. 
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate 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, 2004. Foreign Currency Exchange Rate Risk The Companys exposure to fluctuations in foreign currency exchange rates is primarily the
result of foreign subsidiaries domiciled in the United Kingdom, Canada and Ireland. The Company
does not currently use financial derivative instruments to hedge foreign currency exchange rate
risks associated with its foreign subsidiaries. The assets and liabilities of the Companys Canada, Ireland, and United Kingdom subsidiaries are
translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at the average exchange rates prevailing during the period. The
cumulative translation effects for the subsidiaries are included in cumulative translation
adjustment in stockholders equity. 18




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There have been no changes in the Companys foreign operations that would materially alter the
disclosures on foreign currency exchange risk made in the Companys Annual Report on Form 10-K
for the year ended December 31, 2004. 
 ITEM 4. Controls and Procedures (a) Disclosure controls and procedures The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required
financial disclosure. The Company conducted an evaluation, under the supervision and with the participation of the
Companys Disclosure Committee and management, including the CEO and CFO, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures as of March 31,
2005. The Company has not completed implementation of the changes it believes are required to
fully remediate the material weaknesses in internal control over financial reporting, previously
reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2004,
relating to maintaining effective controls over (i) the monthly reconciliation of cash accounts
for its operations in the United Kingdom, and (ii) the determination of certain significant
employee related accruals in accordance with generally accepted accounting principles. As a
result, the CEO and CFO have concluded that the Companys disclosure controls and procedures
were not effective as of March 31, 2005. (b) Changes in internal control over financial reporting During the first quarter of 2005 the Company has implemented, or is in the process of
implementing, the following remediation steps to correct the two material weaknesses identified: (i) internal controls over the monthly reconciliation of cash accounts for the Companys
operations in the United Kingdom:  
    Management has performed a comprehensive treasury assessment to determine the
optimal account structure for the existing business and for planned growth in the
United Kingdom; and
    As part of this assessment, management has established a plan to restructure the
cash depository and disbursement system to facilitate more timely review and resolution
of reconciling items; and
    Management has increased oversight of routine monthly and quarterly account
reconciliation procedures to ensure compliance with established procedures. (ii) internal controls over the determination of certain significant employee related accruals
in accordance with generally accepted accounting principles: 19




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
    Management has enhanced the documentation of the methodology employed to evaluate
significant accrual balances; and
    Management has implemented procedures to develop and maintain more thorough,
detailed contemporaneous analyses and assessments of significant account balances, and
has expanded the supporting source documents to include additional reporting from
insurance carriers. The Company believes that, once fully implemented, these remediation steps will be sufficient to
address the material weaknesses discussed above. Except as discussed above, there were no changes in the Companys internal control over
financial reporting during its most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect the Companys internal control over
financial reporting. (c) Limitation on the effectiveness of internal control over financial reporting Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Companys internal control system is a process designed to
provide reasonable assurance to the Companys management and the board of directors regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined effective can provide only reasonable assurance with respect to
financial statement preparation and presentation, and internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods is subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. 20




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PART II  OTHER INFORMATION 
 ITEM 1. Legal Proceedings: Not Applicable 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable 
 ITEM 3. Defaults Upon Senior Securities: None 
 ITEM 4. Submission of Matters to a Vote of Security Holders: Not applicable 
 ITEM 5. Other information: Not applicable 
 ITEM 6. Exhibits and Reports on Form 8-K: (a) 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
 21




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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 10, 2005 BRIGHT HORIZONS FAMILY SOLUTIONS, INC.By:
    /s/ Elizabeth J. BolandElizabeth J. BolandChief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer) 22