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FORM 10-Q SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2004.
 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from 
to .
 Commission File Number 0-24699 BRIGHT HORIZONS FAMILY SOLUTIONS, INC. (Exact name of registrant as specified in its charter)
 DELAWARE
    
    62-1742957(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer Identification No.)
 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
[  ]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).Yes [X] No
[  ] Indicate the number of shares outstanding of each of the registrants classes
of common stock as of the latest practicable date: 13,320,037 shares of common
stock, $.01 par value, at August 5, 2004.




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FORM 10-Q INDEX PageNumberPART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    Consolidated Financial StatementsA.
    
    Consolidated Balance Sheets at June 30, 2004 (unaudited) and
December 31, 2003
    
    
    3B.
    
    Consolidated Statements of Operations for the Three and Six Months
ended June 30, 2004 and 2003 (unaudited)
    
    
    4C.
    
    Consolidated Statements of Cash Flows for the Six Months ended June
30, 2004 and 2003 (unaudited)
    
    
    5D.
    
    Notes to Consolidated Financial Statements (unaudited)
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18ITEM 4.
    
    Controls and Procedures
    
    
    19PART II.
    
    OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    19ITEM 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    19ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    19ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19ITEM 5.
    
    Other Information
    
    
    20ITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    20SIGNATURE
    
    
    22INDEX TO EXHIBITS
    
    
    23EX-3  RESTATED CERTIFICATE OF INCORPORATION, AS AMENDEDEX-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




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Bright Horizons Family Solutions, Inc. 
   June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    45,311
    
    
    $
    33,899Accounts receivable, net
    
    
    25,411
    
    
    
    27,937Prepaid expenses and other current assets
    
    
    10,328
    
    
    
    7,204Prepaid income taxes
    
    
    940
    
    
    
    356Current deferred tax asset
    
    
    13,135
    
    
    
    11,657Total current assets
    
    
    95,125
    
    
    
    81,053Fixed assets, net
    
    
    107,297
    
    
    
    98,201Goodwill, net
    
    
    69,477
    
    
    
    55,652Other intangibles, net
    
    
    7,255
    
    
    
    5,679Non-current deferred tax asset
    
    
    5,874
    
    
    
    5,829Other assets
    
    
    628
    
    
    
    651Total assets
    
    $
    285,656
    
    
    $
    247,065LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt and
obligations due under capital leases
    
    $
    690
    
    
    $
    669Accounts payable and accrued expenses
    
    
    63,657
    
    
    
    52,378Deferred revenue, current portion
    
    
    27,780
    
    
    
    26,610Other current liabilities
    
    
    4,369
    
    
    
    3,665Total current liabilities
    
    
    96,496
    
    
    
    83,322Long-term debt and obligations due under
capital leases, net of current portion
    
    
    1,638
    
    
    
    1,992Accrued rent
    
    
    2,632
    
    
    
    2,757Other long-term liabilities
    
    
    4,213
    
    
    
    4,060Deferred revenue, net of current portion
    
    
    17,183
    
    
    
    9,428Total liabilities
    
    
    122,162
    
    
    
    101,559Stockholders equity:Preferred stock: 5,000,000 shares authorized, none issued or outstandingCommon stock: $.01 par valueAuthorized: 50,000,000 sharesIssued and outstanding: 13,288,000 and 13,085,000 shares at
June 30, 2004 and December 31, 2003, respectively
    
    
    133
    
    
    
    131Additional paid-in capital
    
    
    97,912
    
    
    
    91,233Deferred compensation
    
    
    (1,825
    )
    
    
    (14
    )Cumulative translation adjustment
    
    
    4,618
    
    
    
    4,481Retained earnings
    
    
    62,656
    
    
    
    49,675Total stockholders equity
    
    
    163,494
    
    
    
    145,506Total liabilities and
stockholders equity
    
    $
    285,656
    
    
    $
    247,065
 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
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    136,800
    
    
    $
    117,047
    
    
    $
    268,147
    
    
    $
    229,454Cost of services
    
    
    113,799
    
    
    
    99,031
    
    
    
    224,205
    
    
    
    194,330Gross profit
    
    
    23,001
    
    
    
    18,016
    
    
    
    43,942
    
    
    
    35,124Selling, general and administrative
    
    
    10,986
    
    
    
    9,225
    
    
    
    21,279
    
    
    
    18,450Amortization
    
    
    246
    
    
    
    88
    
    
    
    444
    
    
    
    215Income from operations
    
    
    11,769
    
    
    
    8,703
    
    
    
    22,219
    
    
    
    16,459Interest income
    
    
    97
    
    
    
    111
    
    
    
    176
    
    
    
    159Interest
expense
    
    
    (37
    )
    
    
    (34
    )
    
    
    (81
    )
    
    
    (44
    )Income before tax
    
    
    11,829
    
    
    
    8,780
    
    
    
    22,314
    
    
    
    16,574Income tax provision
    
    
    4,951
    
    
    
    3,653
    
    
    
    9,333
    
    
    
    6,919Net income
    
    $
    6,878
    
    
    $
    5,127
    
    
    $
    12,981
    
    
    $
    9,655Earnings per share  basic
    
    $
    0.52
    
    
    $
    0.41
    
    
    $
    0.98
    
    
    $
    0.77Weighted average shares  basic
    
    
    13,235
    
    
    
    12,600
    
    
    
    13,180
    
    
    
    12,526Earnings per share  diluted
    
    $
    0.50
    
    
    $
    0.39
    
    
    $
    0.94
    
    
    $
    0.74Weighted average shares  diluted
    
    
    13,879
    
    
    
    13,240
    
    
    
    13,850
    
    
    
    13,127
 The accompanying notes are an integral part of the consolidated financial statements. 4




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Bright Horizons Family Solutions, Inc. 
    Six months endedJune 30,
    
    June 30,2004
    
    2003Net income
    
    $
    12,981
    
    
    $
    9,655Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    5,934
    
    
    
    5,237Non-cash expenses
    
    
    25
    
    
    
    350Stock-based
compensation expense
    
    
    302
    
    
    
    24Deferred income taxes
    
    
    (1,519
    )
    
    
    Tax benefit realized from the exercise of stock options
    
    
    1,475
    
    
    
    Loss on disposal of fixed assets
    
    
    40
    
    
    
    62Changes in assets and liabilities:Accounts receivable
    
    
    2,588
    
    
    
    (4,327
    )Prepaid expenses and other current assets
    
    
    (1,923
    )
    
    
    (1,342
    )Accounts payable and accrued expenses
    
    
    10,812
    
    
    
    5,256Income taxes
    
    
    (584
    )
    
    
    (1,194
    )Deferred revenue
    
    
    (22
    )
    
    
    1,356Accrued rent
    
    
    (74
    )
    
    
    316Other assets
    
    
    11
    
    
    
    (60
    )Other current and long-term liabilities
    
    
    328
    
    
    
    367Net cash provided by operating activities
    
    
    30,374
    
    
    
    15,700Cash flows from investing activities:Additions to fixed assets, net of acquired amounts
    
    
    (4,299
    )
    
    
    (10,596
    )Proceeds from the disposal of fixed assets
    
    
    43
    
    
    
    303Payments for acquisitions, net of cash acquired
    
    
    (17,310
    )
    
    
    Net cash used in investing activities
    
    
    (21,566
    )
    
    
    (10,293
    )Cash flows from financing activities:Proceeds from the issuance of common stock
    
    
    3,093
    
    
    
    3,063Principal payments of long term debt and
obligations due under capital leases
    
    
    (333
    )
    
    
    (150
    )Proceeds from note payable
    
    
    
    
    
    
    1,874Net cash provided by financing activities
    
    
    2,760
    
    
    
    4,787Effect of exchange rates on cash balances
    
    
    (156
    )
    
    
    81Net increase in cash and cash equivalents
    
    
    11,412
    
    
    
    10,275Cash and cash equivalents, beginning of period
    
    
    33,899
    
    
    
    28,193Cash and cash equivalents, end of period
    
    $
    45,311
    
    
    $
    38,468
 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 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, 2003, and should
be read in conjunction with the notes thereto. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. In the opinion of the Companys management, the accompanying unaudited
consolidated financial statements contain all adjustments which are
necessary to present fairly its financial position as of June 30, 2004, and
the results of its operations and cash flows for the three and six month
periods ended June 30, 2004 and 2003, 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. Segment Information As of June 30, 2004, 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. Stock-Based Compensation Statement of Financial Accounting Standards
(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 6




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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. Under APB Opinion No. 25, no compensation cost related to employee stock
options has been recognized as 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 consistent with the provisions of SFAS No. 123
and 148, the Companys
net income and earnings per share would have been reduced to the following
pro forma amounts for the three and six-month periods ended June 30, 2004
and 2003. Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In thousands except per share data)Net income:As reported
    
    $
    6,878
    
    
    $
    5,127
    
    
    $
    12,981
    
    
    $
    9,655Add: Stock-based
compensation expense
included in reported net
income, net of related
tax effects
    
    
    124
    
    
    
    7
    
    
    
    189
    
    
    
    14Deduct: Total
stock-based
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects
    
    
    (693
    )
    
    
    (892
    )
    
    
    (1,323
    )
    
    
    (1,814
    )As reportedPro forma
    
    $
    6,309
    
    
    $
    4,242
    
    
    $
    11,847
    
    
    $
    7,855Earnings per share-Basic:As reported
    
    $
    0.52
    
    
    $
    0.41
    
    
    $
    0.98
    
    
    $
    0.77Pro forma
    
    $
    0.48
    
    
    $
    0.34
    
    
    $
    0.90
    
    
    $
    0.63Earnings per share-Diluted:As reported
    
    $
    0.50
    
    
    $
    0.39
    
    
    $
    0.94
    
    
    $
    0.74Pro forma
    
    $
    0.46
    
    
    $
    0.33
    
    
    $
    0.86
    
    
    $
    0.61
 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 ended
    
    Six Months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    

    0.0
    %
    
    
    0.0
    %Expected stock price
volatility
    
    
    41.5
    %
    
    
    49.1
    %
    
    
    41.5
    %
    
    
    49.1
    %Risk free interest rate
    
    
    2.20
    %
    
    
    1.99
    %
    
    
    2.20
    %
    
    
    1.99
    %Expected life of options
    
    6.4 years
    
    7.3 years
    
    6.4 years
    
    7.3 yearsWeighted-average fair
value per share of options
granted during the period
    
    $
    21.34
    
    
    $
    15.69
    
    
    $
    21.34
    
    
    $
    14.41
 7




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The Company granted 23,000 shares of restricted common stock during the
six-month period ended June 30, 2004. 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 the three to five year vesting
periods. The restricted stock grants were valued at $1,087,000 of which
approximately $108,000 and $210,000 were recognized as compensation expense
in the three and six month periods ended June 30, 2004, respectively. The
remaining unrecognized balance has been recorded as deferred compensation in
Stockholders Equity at June 30, 2004. In June 2004, the Companys former Executive Chairman of the Board of
Directors resigned his employment with the Company. At the time of
resignation, the terms for any unvested stock options were modified to allow
for a continuation of vesting so long as the former employee continues in
his capacity as an active member of the Board of Directors. As a result of
the modification of the terms of the stock option grants, the Company has
accounted for the options under the provisions of FASB Interpretation
(FIN) No. 44. Deferred compensation of $969,000 was recorded and will be
recognized over the remaining option vesting periods, of which $71,000 was
expensed in June 2004. 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. Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In thousands)Net income
    
    $
    6,878
    
    
    $
    5,127
    
    
    $
    12,981
    
    
    $
    9,655Foreign currency
translation adjustments
    
    
    (419
    )
    
    
    1,062
    
    
    
    137
    
    
    
    715Comprehensive income
    
    $
    6,459
    
    
    $
    6,189
    
    
    $
    13,118
    
    
    $
    10,370
 Recently Issued Accounting
Pronouncements In January 2003, the FASB issued
Interpretation (FIN) No. 46, Consolidation of Variable Interest
Entities, which addresses consolidation by business enterprises of variable
interest entities (VIEs) that either: (1) do not have sufficient equity
investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) the equity investors lack
an essential characteristic of a controlling financial interest. Throughout
2003, the FASB released numerous proposed and final FASB Staff Positions
(FSP) regarding FIN 46, which both clarified and modified FIN 46s
provisions. On December 24, 2003, the FASB issued revised Interpretation No.
46 (FIN 46-R) which replaced FIN 46. The
application of FIN 46 to VIEs created after February 1, 2003, did not result
in any entities requiring consolidation that would not already have required
consolidation under the voting equity interest model. The Company adopted
FIN 46-R during the three-month period 8




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ended March 31, 2004. The adoption of this pronouncement did not have a
material effect on the consolidated financial statements. Reclassifications-Certain
amounts in the prior years financial statements have been
reclassified to conform with the current years presentation. 2. Acquisitions In 2004, the Company acquired the outstanding stock of a multi-site child
care and early education company in the United Kingdom, and purchased the
assets of a domestic single-site child care and early education company. The
Company paid aggregate consideration of approximately $17.5 million, of
which $17.3 million was in the form of cash, and the incurrence of
liabilities of $200,000. The above acquisitions and the operating results
of the acquired companies have been included in the Companys consolidated
results of operations from the respective dates of acquisition. A
preliminary allocation of purchase prices has been based on the estimated
fair value of the assets and liabilities acquired at the date of
acquisition. The acquisitions are 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 June 30, 2004(in thousands, except per share data)Earnings
    
    Shares
    
    Per Share(Numerator)

    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
Stockholders
    
    $
    6,878
    
    
    
    13,235
    
    
    $
    0.52Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    644Diluted earnings per share
    
    $
    6,878
    
    
    
    13,879
    
    
    $
    0.50
 Three months ended June 30, 2003(in thousands, except per share data)Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
Stockholders
    
    $
    5,127

    
    
    
    12,600
    
    
    $
    0.41Effect of dilutive securities:Stock options
    
    
    
    
    
    
    640Diluted earnings per share
    
    $
    5,127
    
    
    
    13,240
    
    
    $
    0.39
 9




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Six months ended June 30, 2004(in thousands, except per share data)Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    12,981
    
    
    
    13,180
    
    
    $
    0.98Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    670Diluted earnings per share
    
    $
    12,981
    
    
    
    13,850
    
    
    $
    0.94
 Six months ended June 30, 2003(in thousands, except per share data)Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    9,655
    
    
    
    12,526
    
    
    $
    0.77Effect of dilutive securities:Stock options
    
    
    
    
    
    
    601Diluted earnings per share
    
    $
    9,655
    
    
    
    13,127
    
    
    $
    0.74
 The weighted average number of shares excluded from the above calculations
for the three and six months ended June 30, 2004 were approximately 1,000
and 750 and approximately 11,000 and 158,000 for the three months and six
month periods ended June 30, 2003, respectively, as their effect would be
anti-dilutive. For the three and six month periods ended June 30, 2004 and
2003, the Company had no warrants or preferred stock outstanding. 4. Statement of Cash Flow Supplemental Information The following table presents supplemental disclosure of cash flow
information for the six month periods ended June 30, 2004 and 2003: Six months ended June 30,2004
    
    2003(in thousands)Supplemental cash flow information:Cash payments of income taxes
    
    $
    10,547
    
    
    $
    8,288Cash payments of interest
    
    $
    81
    
    
    $
    18
 In June 2004, the
Company entered into service agreements to manage a group of
family programs and amended an agreement to manage an existing child care
center in exchange for the transfer of land and buildings. The Company
recorded fixed assets and deferred 10




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revenue of $9.4 million
in connection with the transactions, which will be
earned over the terms of the arrangements that are 6.5 to
13 years, respectively. In the event of default under the terms
of contingent notes payable associated with the service agreements,
the balance of which are represented by the unamortized amounts of
deferred revenue, the Company would be required to tender a cash
payment(s) for the balance of the notes payable or surrender the
applicable property(s). 5. 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. The Company is guarantor on a lease for a childcare center that was
transitioned to another provider. The lease guarantee expires in June 2006.
Management estimates that its current obligations associated with this
lease, including real estate taxes and related expenses, are approximately
$453,000 and this amount has been recorded as an accrued liability at June
30, 2004. 11




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report. 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. Important factors
that could cause actual results to differ from expectations include, among
others:  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; 12




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##### Table of Contents



 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 obtain insurance at the same levels, or at costs
comparable to those incurred historically; and  other risk factors that are discussed in our annual report on Form 10-K
for the fiscal year ended December 31, 2003, filed with the Securities and
Exchange Commission on March 15, 2004 and, from time to time, in our other
Securities and Exchange Commission reports and filings. 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 Family Solutions is a leading provider of workplace services
for employers and families, including early care and education and strategic
work/life consulting. As of June 30, 2004, the Company managed 525 early
care and education centers, with over 50 early care and education centers
under development. During the three-month period ending June 30, 2004, the
Company opened 14 new centers and closed 4 centers. Five of the new center
openings were in the United States and nine were in the United Kingdom. The
Company has the capacity to serve more than 60,600 children in 38 states,
the District of Columbia, Canada, Ireland and the United Kingdom, and has
partnerships with many leading employers, including more than 80 Fortune 500
companies and 50 of Working MotherMagazines 100 Best Companies for
Working Mothers in 2003. The Companys United States centers average
capacity is 128 children per location or 56,200 in total capacity. In Europe
and Canada, center capacity averages approximately 51 children per location
or 4,400 in total capacity. As of June 30, 2004, approximately 60% of the
Companys centers were profit and loss (P&L) models and approximately 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. The Company currently operates 439 early care and education centers in North
America and 86 early care and education centers in the United Kingdom and
Ireland. 13




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##### Table of Contents



The Company operates centers for a diversified group of clients. At June 30,
2004, the Companys early care and education centers were affiliated with
the following industries: PercentageIndustry Classification
    
    of CentersConsumer
    
    
    8
    %Financial Services
    
    
    15
    %Government
    
    
    13
    %Healthcare
    
    
    11
    %Higher education
    
    
    3
    %Industrial/manufacturing
    
    
    6
    %Office park consortiums and other
    
    
    29
    %Pharmaceutical
    
    
    6
    %Technology
    
    
    9
    %
 The Company was able to continue its revenue and net income growth during the
first six months in 2004 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. Notwithstanding the revenue and net income growth for the first
six months of 2004, the timing and pace of the economic recovery remains the
largest single variable in terms of future performance, impacting both client
spending budgets, industry specific sales leads and the overall sales cycle.
Several factors contributed to the revenue growth during the first six
months including growth in the number of centers we manage, price increases
and enrollment gains. The Company expanded its capacity in the United
Kingdom in the second quarter by 20% with the acquisition of a nine site
early care and education company in June 2004. Barring any major changes in
economic conditions, the Company is projecting continued revenue growth
through the remainder of 2004 in a manner consistent with its growth to date
and subject to the risks noted herein. Complementing the approximate 17% revenue growth achieved during the three
and six month periods ended June 30, 2004 as compared to the prior periods,
the Company also improved both operating margins and net income. The
improvement is due to several factors including tuition increases, careful
management of labor costs, modest enrollment gains in the mature center base
and the addition of new centers through acquisitions and transitions of
management. The Company believes that changing demographics of the workforce will drive
employers to continue to make investments in work/life support benefits, such
as work-site child care, in order to remain competitive over the long run.
This trend, along with an under-supply of high quality child care available
to working parents and increasing awareness of the importance of early
education is expected to drive continued growth in the Companys early care
and education business. The Companys business is subject to seasonal and quarterly fluctuations.
Demand for childcare and early education services has historically decreased
during the summer months. This is due mainly to older children transitioning
to elementary 14




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##### Table of Contents



school and other alternative child care arrangements in the Summer months.
Demand for the Companys services generally increases in September and
October upon the commencement of the new school year and remains relatively
stable throughout the remainder of the traditional 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
levels 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
contract model mix (P&L vs. Cost plus) of new and existing centers,
competitive factors and general economic conditions. Results of Operations The following table sets forth certain statement of operations data as a
percentage of revenue for the three and six month periods ended June 30,
2004 and 2003: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    83.2
    
    
    
    84.6
    
    
    
    83.6
    
    
    
    84.7Gross profit
    
    
    16.8
    
    
    
    15.4
    
    
    
    16.4
    
    
    
    15.3Selling, general & administrative
    
    
    8.0
    
    
    
    7.9
    
    
    
    7.9
    
    
    
    8.0Amortization
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Income from operations
    
    
    8.6
    
    
    
    7.4
    
    
    
    8.3
    
    
    
    7.2Interest income
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0Income before income taxes
    
    
    8.6
    
    
    
    7.5
    
    
    
    8.3
    
    
    
    7.2Income tax provisions
    
    
    3.6
    
    
    
    3.1
    
    
    
    3.5
    
    
    
    3.0Net income
    
    
    5.0
    %
    
    
    4.4
    %
    
    
    4.8
    %
    
    
    4.2
    %
 Three and Six Months Ended June 30, 2004 Compared to the Three and Six
Months Ended June 30, 2003 Revenue. Revenue increased $19.8 million, or 16.9%, to $136.8 million for
the three months ended June 30, 2004 from $117.0 million for the three
months ended June 30, 2003. Revenue increased $38.6 million or 16.9% to
$268.1 million for the six months ended June 30, 2004 from $229.5 million
for the six months ended June 30, 2003. The growth in revenues is primarily
attributable to the net addition of 44 centers since June 30, 2003,
additional enrollment in ramping as well as mature 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 $5.0 million, or
27.7%, to $23.0 million for the three-month period ended June 30, 2004 from
$18.0 million for the three months ended June 30, 2003. Gross profit
increased $8.8 million, or 25.1%, to $43.9 million for the six-month period
ended June 30, 2004 from $35.1 million for the six months ended June 30,
2003. As a percentage of revenue, gross profit increased to 16.8% for the
three months ended 15




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June 30, 2004 compared to 15.4% for the three months ended June 30, 2003. As
a percentage of revenue, gross profit increased to 16.4% for the six months
ended June 30, 2004 compared to 15.3% for the six months ended June 30,
2003. The increase in gross profit margin for the three and six month periods
ended June 30, 2004 compared to the same periods in 2003 resulted from the
ability to pace tuition increases in advance of operating cost increases,
particularly in the area of personnel costs as well as the ability to manage
staffing levels. The influence of a greater proportion of mature centers in
the Companys mix also had the effect of increasing overall margins as did
the contributions from centers acquired in the second half of 2003 and
transitions of management. 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 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. Additionally, even modest increases in center
labor costs will cause compression of gross profit margins if the Company is
unable to pass on the increased labor costs through tuition increases. 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 $1.8 million, or 19.1%, to $11.0 million
for the three months ended June 30, 2004 from $9.2 million for the three
months ended June 30, 2003. SGA increased $2.8 million, or 15.3%, to $21.3
million for the six months ended June 30, 2004 from $18.5 million for the
six months ended June 30, 2003. As a percentage of revenue, SGA increased
to 8.0% for the three months ended June 30, 2004 compared to 7.9% for the
same period in 2003. As a percentage of revenue, SGA decreased to 7.9% for
the six months ended June 30, 2004 compared to 8.0% for the same period in
2003. The dollar increase in SGA for the three and six month periods ended June
30, 2004 as compared to the same periods in 2003 is attributable to
investments in regional and divisional management, general corporate and
administrative personnel and information systems, which the Company believes
are necessary to support long-term growth, in addition to incremental
spending associated with the Companys compliance with the provisions of the
Sarbanes-Oxley Act. Amortization.Amortization expense on intangible assets other than goodwill
totaled $246,000 and $444,000 for the three and six month periods ended June
30, 2004, as compared to $88,000 and $215,000 in the same periods for 2003,
and the increase relates principally 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 2003 and in
2004, which are subject to amortization. Income from Operations. Income from operations totaled $11.8 million for the
three month period ended June 30, 2004, an increase of $3.1 million, or
35.2%, from $8.7 million in the same period for 2003. Income from operations
totaled $22.2 million for the six month period ended June 30, 2004, an
increase of $5.7 million, or 35.0%, from 16




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$16.5 million in the same period for 2003. This increase is primarily the
result of the indicated revenue and gross margin improvements offset
partially by the increases in amortization expense and SGA expenses. Income Tax Expense. The Companys effective income tax rate of approximately
41.8% for the six month period ended June 30, 2004 closely approximates the
effective income tax rate of 41.7% for the same period in 2003. The Company
expects the overall effective tax rate to decrease modestly for the
remainder of the year due to contributions from the acquisition made in the
United Kingdom in June 2004 since the rate of taxation that the
Company is subject to in the United Kingdom is lower than that of the
United States. 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 $45.3 million at June 30, 2004. The
Companys cash balances may be
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 deficit of $1.4 million as of June 30,
2004 and a working capital deficit of $2.3 million at December 31, 2003. The
Companys historical working capital deficits have primarily arisen from
investments in fixed assets and acquisitions, which were paid in cash, that
are of a long-term nature. The Company anticipates that it will continue to
generate positive cash flows from operating activities in 2004 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 $30.4 million for the six month period
ended June 30, 2004, as compared to cash provided by operations of $15.7
million for the six month period ended June 30, 2003. The increase is
primarily the result of increases in net income, as well as the timing and
collections of accounts receivable and an increase in accounts payable and
accrued expense balances. The increases in accounts payable and
accrued expense balances were due principally to increases in payroll
and personnel related accruals as well as accounts payable and
insurance accruals (all of which are of a normal and recurring nature) for
the six month period ended June 30, 2004 as compared to the same period in
2003. Cash used in
investing activities totaled $21.6 million for the six month
period ended June 30, 2004, compared to $10.3 million in the corresponding
period in 2003, with the increase largely attributable to $17.3 million of
payments for acquisitions in 2004. Fixed asset additions totaled $4.3
million as of June 30, 2004 with $1.5 million related to new early care and
education centers and the remainder related to the refurbishment of early
care and education centers. Cash provided by financing activities totaled $2.8 million for the six month
period ended June 30, 2004 as compared to $4.8 million in cash provided by
financing activities for the six month period ended June 30, 2003. The
Company received $3.1 million for stock option exercises in the six-month
periods ended June 30, 2004 and 2003. In 2003, the Company also received
$1.9 million in proceeds from a note payable. 17




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Management believes that funds provided by operations, the Companys
existing cash and cash equivalent balances and borrowings available under
its line of credit 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 that the Company would be able to obtain such
financing on reasonable terms, if at all. Recently Issued Accounting Pronouncements In January 2003, the FASB issued Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities (VIEs) that either:
(1) do not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or
(2) the equity investors lack an essential characteristic of a controlling
financial interest. Throughout 2003, the FASB released numerous proposed
and final FASB Staff Positions (FSP) regarding FIN 46, which both
clarified and modified FIN 46s provisions. On December 24, 2003, the FASB
issued revised Interpretation No. 46 (FIN 46-R) which will replace FIN 46
upon its effective date. The application of FIN 46 to VIEs created after
February 1, 2003, did not result in any entities requiring consolidation
that would not already have required consolidation under the voting equity
interest model. The Company adopted FIN 46-R during the three-month period
ended March 31, 2004. The adoption of this pronouncement did not have a
material effect on the consolidated financial statements. 
 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,
2003. 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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##### Table of Contents



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,
2003. 
 ITEM 4. Controls and Procedures An evaluation was performed under the supervision and with the participation
of our senior management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 as of the end of the period covered by
this quarterly report. Based on that evaluation, our senior management,
including our Chief Executive Officer and Chief Financial Officer, concluded
that as of the end of the period covered by this quarterly report our
disclosure controls and procedures are effective in causing material
information relating to us (including our consolidated subsidiaries) to be
recorded, processed, summarized and reported by management on a timely basis
and to ensure that the quality and timeliness of our public disclosures
complies with SEC disclosure obligations. There have been no changes in our
internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are likely to
materially affect, our internal control over financial reporting. 
 PART II  OTHER INFORMATION 
 ITEM 1. Legal Proceedings: Not Applicable 
 ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities: Not applicable 
 ITEM 3. Defaults Upon Senior Securities: None 
 ITEM 4. Submission of Matters to a Vote of Security Holders: The Company held its annual meeting of stockholders on May 27, 2004. At the
annual meeting, the stockholders of the Company voted to elect four Class
III directors for a term of three years and one Class II director for a term
of two years and until their successors are duly elected and qualified. The
following table sets forth the number of votes cast for and against/withheld
with respect to each of the director nominees: Nominee
    
    For
    
    Against/WithheldFred K. Foulkes (Class III)
    
    
    11,444,078
    
    
    
    506,848Linda A. Mason (Class III)
    
    
    11,257,356
    
    
    
    693,750
 19




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##### Table of Contents



Ian M. Rolland (Class III)
    
    
    11,287,110
    
    
    
    663,816Mary Ann Tocio (Class III)
    
    
    11,302,671
    
    
    
    648,255David Gergen (Class II)
    
    
    11,458,570
    
    
    
    492,356
 In addition to the foregoing directors, the following table sets forth the
other members of the Board of Directors whose term of office continued after
the meeting and the year in which his or her term expires: Name
    
    Term ExpiresJoshua Bekenstein
    
    
    2005JoAnne Brandes
    
    
    2005Roger H. Brown
    
    
    2005E. Townes Duncan
    
    
    2006Sarah Lawrence-Lightfoot
    
    
    2006David H. Lissy
    
    
    2006
 The stockholders of the Company also voted to approve an amendment to
Bright Horizons Family Solutions Inc.s Certificate of Incorporation to
increase the authorized number of shares of common stock from 30,000,000 to
50,000,000 shares. The following table sets forth the votes cast for and
against/withheld with respect to the aforementioned amendment: Proposal 2-Approval ofAmendment to theCertificate ofIncorporation
    
    For
    
    Against
    
    Abstain9,822,459
    
    
    
    2,121,401
    
    
    
    7,066
 
 ITEM 5. Other information: Not applicable 
 ITEM 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 3
    
    
    Certificate of Incorporation, as
amended (Restated for purposes of EDGAR)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 2002
 20




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##### Table of Contents



32.1
    
    
    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.
 (b) Reports on Form 8-K The following report on Form 8-K was filed with the SEC during the
period April 1, 2004 through June 30, 2004: On April 21, 2004, the Company furnished a Form 8-K under Item
12 related to the Companys press release announcing its first
quarter earnings results. The following report on Form 8-K was filed with the SEC subsequent
to June 30, 2004 and prior to the date of this report: On July 22, 2004, the Company furnished a Form 8-K under Item
12 related to the Companys press release announcing its second
quarter earnings results. 21




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##### Table of Contents



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: August 9, 2004 BRIGHT HORIZONS FAMILY SOLUTIONS, INC.By:
    /s/ Elizabeth J. BolandElizabeth J. BolandChief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer) 22




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##### Table of Contents



INDEX OF EXHIBITS 3
    
    Certificate of Incorporation, as
amended (Restated for purposes of EDGAR).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 2002.31.2
    
    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 2002.32.1
    
    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 2002.32.2
    
    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