##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 for the quarterly period ended June 30, 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 Number 0-24699
 BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
    
    62-1742957(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 
 
 
 þ o
 þ o




---



##### Table of Contents



FORM 10-Q
INDEX
  
 PageNumberPART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    Consolidated Financial StatementsA.
    
    Consolidated Balance Sheets at June 30, 2005 (Unaudited) and December 31, 2004
    
    3B.
    
    Unaudited Consolidated Statements of Income for the Three and Six Months ended June 30, 2005 and 2004
    
    4C.
    
    Unaudited Consolidated Statements of Cash Flows for the Six Months ended June 30, 2005 and 2004
    
    5D.
    
    Notes to Consolidated Financial Statements (Unaudited)
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    21ITEM 4.
    
    Controls and Procedures
    
    22PART II.
    
    OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    24ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    24ITEM 3.
    
    Defaults Upon Senior Securities
    
    24ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    24ITEM 5.
    
    Other Information
    
    25ITEM 6.
    
    Exhibits
    
    25SIGNATURE
    
    
    
    26Ex-2.1  Agreement and Plan of Merger, dated June 27, 2005Ex-31.1  Section 302 Certification of the CEOEx-31.2  Section 302 Certification of the CFOEx-32.1  Section 906 Certification of the CEOEx-32.2  Section 906 Certification of the CFO
 2




---



##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    82,169
    
    
    $
    42,472Accounts receivable, net
    
    
    29,717
    
    
    
    26,182Prepaid expenses and other current assets
    
    
    11,407
    
    
    
    11,204Prepaid income taxes
    
    
    
    
    
    
    1,764Current deferred tax asset
    
    
    13,410
    
    
    
    12,986Total current assets
    
    
    136,703
    
    
    
    94,608Fixed assets, net
    
    
    111,461
    
    
    
    112,637Goodwill, net
    
    
    75,695
    
    
    
    72,987Other intangibles, net
    
    
    12,924
    
    
    
    12,747Non-current deferred tax asset
    
    
    3,827
    
    
    
    2,837Other assets
    
    
    1,046
    
    
    
    789Total assets
    
    $
    341,656
    
    
    $
    296,605LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt and
obligations due under capital leases
    
    $
    717
    
    
    $
    778Accounts payable and accrued expenses
    
    
    63,875
    
    
    
    51,956Deferred revenue, current portion
    
    
    32,405
    
    
    
    26,494Income tax payable
    
    
    2,755
    
    
    
    274Other current liabilities
    
    
    5,800
    
    
    
    3,287Total current liabilities
    
    
    105,552
    
    
    
    82,789Long-term debt and obligations due under
capital leases, net of current portion
    
    
    988
    
    
    
    1,321Accrued rent
    
    
    5,387
    
    
    
    4,902Other long-term liabilities
    
    
    5,496
    
    
    
    5,203Deferred revenue, net of current portion
    
    
    16,309
    
    
    
    16,146Total liabilities
    
    
    133,732
    
    
    
    110,361Commitments and Contingencies (Note 4)Stockholders equity:Preferred stock: 5,000,000 shares authorized, none issued or
outstandingCommon stock: $.01 par valueAuthorized: 50,000,000 shares at both June 30, 2005 and
December 31, 2004Issued and outstanding: 27,270,000 and 26,870,000 shares at
June 30, 2005 and December 31, 2004, respectively
    
    
    272
    
    
    
    268Additional paid-in capital
    
    
    109,493
    
    
    
    101,584Deferred compensation
    
    
    (1,702
    )
    
    
    (1,085
    )Cumulative translation adjustment
    
    
    5,038
    
    
    
    8,474Retained earnings
    
    
    94,823
    
    
    
    77,003Total stockholders equity
    
    
    207,924
    
    
    
    186,244Total liabilities and stockholders equity
    
    $
    341,656
    
    
    $
    296,605
  3




---



##### Table of Contents



Three months ended

    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenues
    
    $
    157,017
    
    
    $
    136,800
    
    
    $
    307,775
    
    
    $
    268,147Cost of services
    
    
    128,279
    
    
    
    113,799
    
    
    
    252,134
    
    
    
    224,205Gross profit
    
    
    28,738
    
    
    
    23,001
    
    
    
    55,641
    
    
    
    43,942Selling, general and administrative
    
    
    12,763
    
    
    
    10,986
    
    
    
    25,322
    
    
    
    21,279Amortization
    
    
    384
    
    
    
    246
    
    
    
    760
    
    
    
    444Income from operations
    
    
    15,591
    
    
    
    11,769
    
    
    
    29,559
    
    
    
    22,219Interest income
    
    
    419
    
    
    
    97
    
    
    
    684
    
    
    
    176Interest expense
    
    
    (49
    )
    
    
    (37
    )
    
    
    (87
    )
    
    
    (81
    )Income before tax
    
    
    15,961
    
    
    
    11,829
    
    
    
    30,156
    
    
    
    22,314Income tax provision
    
    
    6,500
    
    
    
    4,951
    
    
    
    12,336
    
    
    
    9,333Net income
    
    $
    9,461
    
    
    $
    6,878
    
    
    $
    17,820
    
    
    $
    12,981Earnings per share  basic
    
    $
    0.35
    
    
    $
    0.26
    
    
    $
    0.66
    
    
    $
    0.49Weighted average shares  basic
    
    
    27,057
    
    
    
    26,470
    
    
    
    26,976
    
    
    
    26,360Earnings per share  diluted
    
    $
    0.33
    
    
    $
    0.25
    
    
    $
    0.63
    
    
    $
    0.47Weighted average shares  diluted
    
    
    28,365
    
    
    
    27,758
    
    
    
    28,285
    
    
    
    27,701
  4




---



##### Table of Contents



Six months endedJune 30,
    
    June 30,2005
    
    2004Net income
    
    $
    17,820
    
    
    $
    12,981Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,787
    
    
    
    5,934Stock-based compensation expense
    
    
    507
    
    
    
    302Deferred income taxes
    
    
    (1,262
    )
    
    
    (1,519
    )Tax benefit realized from the exercise of stock
options
    
    
    2,313
    
    
    
    1,475Loss on disposal of fixed assets
    
    
    16
    
    
    
    40Other
    
    
    (640
    )
    
    
    25Changes in assets and liabilities:Accounts receivable
    
    
    (3,735
    )
    
    
    2,588Prepaid expenses and other current assets
    
    
    (329
    )
    
    
    (1,923
    )Accounts payable and accrued expenses
    
    
    12,124
    
    
    
    10,812Income taxes
    
    
    4,254
    
    
    
    (584
    )Deferred revenue
    
    
    7,164
    
    
    
    (22
    )Accrued rent
    
    
    549
    
    
    
    (74
    )Other assets
    
    
    (248
    )
    
    
    11Other current and long-term liabilities
    
    
    2,879
    
    
    
    328Net cash provided by operating activities
    
    
    48,199
    
    
    
    30,374Cash flows from investing activities:Additions to fixed assets, net of acquired amounts
    
    
    (5,486
    )
    
    
    (4,299
    )Proceeds from the disposal of fixed assets
    
    
    
    
    
    
    43Payments for acquisitions, net of cash acquired
    
    
    (6,762
    )
    
    
    (17,310
    )Net cash used in investing activities
    
    
    (12,248
    )
    
    
    (21,566
    )Cash flows from financing activities:Proceeds from the issuance of equity awards
    
    
    4,475
    
    
    
    3,093Principal payments of long term debt and
obligations due under capital leases
    
    
    (387
    )
    
    
    (333
    )Net cash provided by financing activities
    
    
    4,088
    
    
    
    2,760Effect of exchange rates on cash balances
    
    
    (342
    )
    
    
    (156
    )Net increase in cash and cash equivalents
    
    
    39,697
    
    
    
    11,412Cash and cash equivalents, beginning of period
    
    
    42,472
    
    
    
    33,899Cash and cash equivalents, end of period
    
    $
    82,169
    
    
    $
    45,311Supplemental cash flow information:Cash payments of interest
    
    
    87
    
    
    
    81Cash payments of income taxes
    
    
    7,293
    
    
    
    10,547
  5




---



##### Table of Contents



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




---



##### Table of Contents



Stock-Based Compensation
   Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands except per share data)Net income:As reported
    
    $
    9,461
    
    
    $
    6,878
    
    
    $
    17,820
    
    
    $
    12,981Add: Stock-based compensation
expense included in reported net
income, net of related tax effects
    
    
    150
    
    
    
    124
    
    
    
    330
    
    
    
    189
 7




---



##### Table of Contents



Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands except per share data)Deduct: Total stock-based
compensation expense
determined under fair value based
method for all awards, net of
related tax effects
    
    
    (1,729
    )
    
    
    (693
    )
    
    
    (3,147
    )
    
    
    (1,323
    )Pro forma
    
    $
    7,882
    
    
    $
    6,309
    
    
    $
    15,003
    
    
    $
    11,847Earnings per share-Basic:As reported
    
    $
    0.35
    
    
    $
    0.26
    
    
    $
    0.66

    
    
    $
    0.49Pro forma
    
    $
    0.29
    
    
    $
    0.24
    
    
    $
    0.56
    
    
    $
    0.45Earnings per share-Diluted:As reported
    
    $
    0.33
    
    
    $
    0.25
    
    
    $
    0.63
    
    
    $
    0.47Pro forma
    
    $
    0.28
    
    
    $
    0.23
    
    
    $
    0.53
    
    
    $
    0.43
  Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Expected dividend yield
    
    0.0%
    
    0.0%
    
    0.0%
    
    0.0%Expected stock price
volatility
    
    45.1%
    
    41.5%
    
    45.6%
    
    41.5%Risk free interest rate
    
    3.36%
    
    2.20%
    
    3.36%
    
    2.20%Expected life of options
    
    5.9 years
    
    6.4 years
    
    6.0 years
    
    6.4 yearsWeighted-average fair
value per share of
options granted during
the period
    
    $17.68
    
    $10.67
    
    $16.17
    
    $10.67
 Comprehensive Income
 Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands)Net income
    
    $
    9,461
    
    
    $
    6,878
    
    
    $
    17,820
    
    
    $
    12,981Foreign currency
translation adjustments
    
    
    (2,478
    )
    
    
    (419
    )
    
    
    (3,436
    )
    
    
    137Comprehensive income
    
    $
    6,983
    
    
    $
    6,459
    
    
    $
    14,384
    
    
    $
    13,118
 8




---



##### Table of Contents



Recently Issued Accounting Pronouncements
    9




---



##### Table of Contents



Reclassifications
      Three months ended June 30, 2005(in thousands, except per share data)Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
Stockholders
    
    $
    9,461
    
    
    
    27,057
    
    
    $
    0.35Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,308Diluted earnings per share
    
    $
    9,461
    
    
    
    28,365
    
    
    $
    0.33
 10




---



##### Table of Contents



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
    
    
    
    26,470
    
    
    $
    0.26Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,288Diluted earnings per share
    
    $
    6,878
    
    
    
    27,758
    
    
    $
    0.25
 Six months ended June 30, 2005(in thousands, except per share data)Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
Stockholders
    
    $
    17,820
    
    
    
    26,976
    
    
    $
    0.66Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,309Diluted earnings per share
    
    $
    17,820
    
    
    
    28,285
    
    
    $
    0.63
 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
    
    
    
    26,360
    
    
    $
    0.49Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    1,341Diluted earnings per share
    
    $
    12,981
    
    
    
    27,701
    
    
    $
    0.47
     11




---



##### Table of Contents



12




---



##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    our inability to successfully execute our growth strategy;
    
    the effects of general economic conditions and world events;
    
    competitive conditions in the early care and education industry;
    
    loss of key client relationships or delays in new center openings;
    
    subsidy reductions by key existing clients;
    
    tuition price sensitivity;
    
    various factors affecting occupancy levels, including, but not limited to, the
reduction in or changes to the general labor force that would reduce the need for
child care services;
    
    the availability of a qualified labor pool, the impact of labor organization efforts and
the impact of government regulations concerning labor and employment issues;
    
    federal and state regulations regarding changes in child care assistance programs,
 13




---



##### Table of Contents



welfare reform, minimum wages and licensing standards;
    
    the loss of government funding for child care assistance programs;
    
    the establishment of a governmentally mandated universal child care benefit;
    
    delays in identifying, executing or integrating key acquisitions;
    
    our inability to successfully defend against or counter negative publicity associated
with claims involving alleged incidents at our centers;
    
    our inability to maintain effective internal controls over financial reporting, or to
have remediation efforts be adequate to address identified deficiencies in internal controls
over financial reporting;
    
    our inability to obtain insurance at the same levels or at costs comparable to those
incurred historically; and
    
    our inability to successfully complete the acquisition of ChildrenFirst, Inc. under the
negotiated terms (as more fully described under Other in Managements
Discussion and Analysis of Financial Condition and Results of Operations (MD&A))
  Executive Summary and Discussion
 Fortune 500 Working Mother
 14




---



##### Table of Contents



Industry Classification
    
    Percentage ofCentersConsumer
    
    5%Financial Services
    
    15%Government and
Education
    
    15%Healthcare/Pharmaceutical
    
    15%Industrial/Manufacturing
    
    10%Office Park Consortiums
    
    25%Professional Services and
Other
    
    5%Technology
    
    10%
     15




---



##### Table of Contents



Seasonality
 Results of Operations
  16




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    81.7
    
    
    
    83.2
    
    
    
    81.9
    
    
    
    83.6Gross profit
    
    
    18.3
    
    
    
    16.8
    
    
    
    18.1
    
    
    
    16.4Selling, general & administrative
    
    
    8.1
    
    
    
    8.0
    
    
    
    8.2
    
    
    
    7.9Amortization
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2Income from operations
    
    
    9.9
    
    
    
    8.6
    
    
    
    9.6
    
    
    
    8.3Interest expense
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0

    
    
    
    0.0Interest income
    
    
    0.3
    
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.0Income before income taxes
    
    
    10.2
    
    
    
    8.6
    
    
    
    9.8
    
    
    
    8.3Income tax provisions
    
    
    4.2
    
    
    
    3.6
    
    
    
    4.0
    
    
    
    3.5Net income
    
    
    6.0
    %
    
    
    5.0
    %
    
    
    5.8
    %
    
    
    4.8
    %
 Three and Six Months Ended June 30, 2005 Compared to the Three and Six Months Ended June 30,
2004
 Revenue
 Gross Profit
  17




---



##### Table of Contents



Selling, General and Administrative Expenses
  Amortization.
 Income from Operations
 Interest Income
 18




---



##### Table of Contents



Interest Expense
 Income Tax Expense
 Liquidity and Capital Resources
    19




---



##### Table of Contents



Recently Issued Accounting Pronouncements
    20




---



##### Table of Contents



Other
      
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
   21




---



##### Table of Contents



ITEM 4. Controls and Procedures
 (a) Disclosure controls and procedures
   22




---



##### Table of Contents



(b) Changes in internal control over financial reporting
   
    
    Management has performed a comprehensive treasury assessment to determine the
optimal account structure for the existing business and for planned growth in the
United Kingdom;
    
    As part of this assessment, management established a plan to restructure the cash
depository and disbursement system to facilitate more timely review and resolution of
reconciling items;
    
    Management executed the restructuring plan during the quarter ended June 30, 2005,
the key elements of which included the establishment of additional control accounts
over major processes such as payroll and purchasing; and
    
    Management has increased oversight of routine monthly and quarterly account
reconciliation procedures to ensure compliance with established procedures.
  
    
    Management has enhanced the documentation of the methodology employed to evaluate
significant accrual balances; and
    
    Management has implemented procedures to develop and maintain more thorough,
detailed contemporaneous analyses and assessments of significant account balances, and
has expanded the supporting source documents to include additional reporting from
insurance carriers.
   (c) Limitation on the effectiveness of internal control over financial reporting
  23




---



##### Table of Contents



PART II  OTHER INFORMATION
 
   
   
   
   Nominee
    
    
    
    
    
    For
    
    Against/WithheldJoshua Bekenstein

    (Class I)

    
    24,458,947
    
    
    
    502,332JoAnne Brandes

    (Class I)

    
    23,667,755
    
    
    
    1,293,525Roger H. Brown

    (Class I)

    
    24,262,692
    
    
    
    698,588Marguerite W. Sallee

    (Class I)

    
    24,265,692
    
    
    
    695,587
  Name
    
    
    
    
    
    Term ExpiresE. Townes Duncan
    
    (Class II)
    
    
    
    
    2006Sara Lawrence-Lightfoot
    
    (Class II)
    
    
    
    
    2006David H. Lissy
    
    (Class II)
    
    
    
    
    2006David Gergen
    
    (Class II)
    
    
    
    
    2006
 24




---



##### Table of Contents



Name
    
    
    
    
    
    Term ExpiresFred K. Foulkes
    
    (Class III)
    
    
    
    
    2007Linda A. Mason
    
    (Class III)
    
    
    
    
    2007Ian M. Rolland
    
    (Class III)
    
    
    
    
    2007Mary Ann Tocio
    
    (Class III)
    
    
    
    
    2007
 
  None
 
  2.1
    
    Agreement and Plan of Merger, dated June 27, 2005, by and among
Bright Horizons Family Solutions, Inc., BFAM Mergersub, Inc. and ChildrenFirst,
Inc. (pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this
agreement are omitted, but will be provided supplementally to the Securities
and Exchange Commission upon request)31.1
    
    Certification of the Companys Chief Executive Officer pursuant
to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Companys Chief Financial Officer pursuant
to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Companys Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of the Companys Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 25




---



##### Table of Contents



SIGNATURE
   BRIGHT HORIZONS FAMILY SOLUTIONS, INC.By:
    
    /s/ Elizabeth J. BolandElizabeth J. BolandChief Financial Officer(Duly Authorized Officer and PrincipalFinancial and Accounting Officer)
 26