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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2004.
 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
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: 13,195,952 shares of common
stock, $.01 par value, at May 6, 2004.




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FORM 10-Q
INDEX PageNumberPART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    Consolidated Financial StatementsA.
    
    Consolidated Balance Sheets at March 31, 2004 (unaudited) and
December 31, 2003
    
    
    3B.
    
    Consolidated Statements of Operations for the Three Months ended
March 31, 2004 and 2003 (unaudited)
    
    
    4C.
    
    Consolidated Statements of Cash Flows for the Three Months ended
March 31, 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
    
    
    10ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    16ITEM 4.
    
    Controls and Procedures
    
    
    17PART II.
    
    OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    17ITEM 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    17ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    17ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17ITEM 5.
    
    Other Information
    
    
    17ITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    17SIGNATURE
    
    
    
    
    
    
    19EXHIBITS
    
    
    
    
    
    
    20EX-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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Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets
(in thousands, except share data) March 31,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    46,484
    
    
    $
    33,899Accounts receivable, net
    
    
    23,718
    
    
    
    27,937Prepaid expenses and other current assets
    
    
    6,778
    
    
    
    7,204Prepaid income taxes
    
    
    
    
    
    
    356Current deferred tax asset
    
    
    11,665
    
    
    
    11,657Total current assets
    
    
    88,645
    
    
    
    81,053Fixed assets, net
    
    
    98,694
    
    
    
    98,201Goodwill, net
    
    
    56,428
    
    
    
    55,652Other intangibles, net
    
    
    5,536
    
    
    
    5,679Non-current deferred tax asset
    
    
    5,828
    
    
    
    5,829Other assets
    
    
    641
    
    
    
    651Total assets
    
    $
    255,772
    
    
    $
    247,065LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt and
obligations due under capital leases
    
    $
    684
    
    
    $
    669Accounts payable and accrued expenses
    
    
    51,979
    
    
    
    52,378Deferred revenue, current portion
    
    
    26,671
    
    
    
    26,610Income tax payable
    
    
    513
    
    
    
    Other current liabilities
    
    
    4,272
    
    
    
    3,665Total current liabilities
    
    
    84,119
    
    
    
    83,322Long-term
debt and obligations due under
capital leases, net of current portion
    
    
    1,812
    
    
    
    1,992Accrued rent
    
    
    2,721
    
    
    
    2,757Other long-term liabilities
    
    
    4,132
    
    
    
    4,060Deferred revenue, net of current portion
    
    
    9,019
    
    
    
    9,428Total liabilities
    
    
    101,803
    
    
    
    101,559Stockholders equity:Preferred
stock: 5,000,000 shares authorized, none issued or outstandingCommon stock: $.01 par valueAuthorized: 30,000,000 sharesIssued and outstanding: 13,175,000 and 13,085,000 shares at March 31, 2004 and
December 31, 2003, respectively
    
    
    132
    
    
    
    131Additional paid-in capital
    
    
    93,816
    
    
    
    91,219Deferred compensation
    
    
    (794
    )
    
    
    Cumulative translation adjustment
    
    
    5,037
    
    
    
    4,481Retained earnings
    
    
    55,778
    
    
    
    49,675Total stockholders equity
    
    
    153,969
    
    
    
    145,506Total liabilities and stockholders equity
    
    $
    255,772
    
    
    $
    247,065
 The accompanying notes are an integral part of the consolidated financial statements. 3




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Bright Horizons Family Solutions, Inc.
Consolidated Statements of Income
(in thousands, except per share data) (Unaudited) Three months ended March 31,2004
    
    2003Revenue
    
    $
    131,347
    
    
    $
    112,407Cost of services
    
    
    110,406
    
    
    
    95,299Gross profit
    
    
    20,941
    
    
    
    17,108Selling, general and administrative
    
    
    10,293
    
    
    
    9,225Amortization
    
    
    198
    
    
    
    127Income from operations
    
    
    10,450
    
    
    
    7,756Interest income
    
    
    79
    
    
    
    49Interest expense
    
    
    (44
    )
    
    
    (11
    )Income
before taxes
    
    
    10,485
    
    
    
    7,794Income tax expense
    
    
    4,382
    
    
    
    3,266Net income
    
    $
    6,103
    
    
    $
    4,528Earnings per share  basic
    
    $
    0.46
    
    
    $
    0.36Weighted
average number of common shares  basic
    
    
    13,125
    
    
    
    12,451Earnings per share  diluted
    
    $
    0.44
    
    
    $
    0.35Weighted
average number of common and common equivalent shares  diluted
    
    
    13,822
    
    
    
    13,012
 The accompanying notes are an integral part of the consolidated financial statements. 4




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Bright Horizons Family Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) Three months endedMarch 31,
    
    March 31,2004
    
    2003Net income
    
    $
    6,103
    
    
    $
    4,528Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,884
    
    
    
    2,618Non-cash expenses
    
    
    127
    
    
    
    12Gain on disposal of fixed assets
    
    
    (7
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    4,315
    
    
    
    (4,489
    )Prepaid expenses and other current assets
    
    
    438
    
    
    
    856Accounts payable and accrued expenses
    
    
    (516
    )
    
    
    (5,329
    )Prepaid income taxes
    
    
    356
    
    
    
    Income taxes payable
    
    
    513
    
    
    
    (1,294
    )Deferred revenue
    
    
    49
    
    
    
    549Accrued rent
    
    
    (11
    )
    
    
    748Other assets
    
    
    31
    
    
    
    (102
    )Other current and long-term liabilities
    
    
    322
    
    
    
    272Net cash provided by (used in) operating activities
    
    
    14,604
    
    
    
    (1,631
    )Cash flows from investing activities:Additions to fixed assets, net of acquired amounts
    
    
    (3,272
    )
    
    
    (5,052
    )Proceeds from the disposal of fixed assets
    
    
    43
    
    
    
    Payments for acquisitions, net of cash acquired
    
    
    (330
    )
    
    
    Net cash used in investing activities
    
    
    (3,559
    )
    
    
    (5,052
    )Cash flows from financing activities:Proceeds from the issuance of common stock
    
    
    1,695
    
    
    
    756Principal payments of long term debt and
obligations due under capital leases
    
    
    (166
    )
    
    
    (116
    )Proceeds from note payable
    
    
    
    
    
    
    699Net cash provided by financing activities
    
    
    1,529
    
    
    
    1,339Effect of exchange rates on cash balances
    
    
    11
    
    
    
    7Net increase (decrease) in cash and cash equivalents
    
    
    12,585
    
    
    
    (5,337
    )Cash and cash equivalents, beginning of period
    
    
    33,899
    
    
    
    28,193Cash and cash equivalents, end of period
    
    $
    46,484
    
    
    $
    22,856
 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 March 31, 2004, and
the results of its operations and cash flows for the three-month periods
ended March 31, 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 March 31, 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 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 and certain options
issued in connection with acquisitions using the fair value method, in
accordance with the provisions of SFAS No. 123. 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, the Companys net
income and earnings per share would have been reduced to the following pro
forma amounts for the three-month periods ended March 31, 2004 and 2003. Three months endedMarch 31,2004
    
    2003Net income:As reported
    
    $
    6,103,000
    
    
    $
    4,528,000Pro forma
    
    $
    5,538,000
    
    
    $
    3,612,000Earnings per share-Basic:As reported
    
    $
    0.46
    
    
    $
    0.36Pro forma
    
    $
    0.42
    
    
    $
    0.29Earnings per share-Diluted:As reported
    
    $
    0.44
    
    
    $
    0.35Pro forma
    
    $
    0.40
    
    
    $
    0.28
 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 31,2004
    
    2003Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected stock price volatility
    
    
    43.8
    %
    
    
    51.6
    %Risk free interest rate
    
    
    1.46
    %
    
    
    1.90
    %Expected life of options
    
    6.5 years
    
    7.3 yearsWeighted-average fair
value per share of options
granted during the period
    
    $
    21.48
    
    
    $
    14.54
 7




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The Company granted 19,000 shares of restricted common stock during the
quarter ended March 31, 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 five year vesting period.
The restricted stock grant was valued at $897,000 of which approximately
$100,000 was recognized as compensation expense in the period ended March
31, 2004. The remaining unrecognized balance has been recorded as deferred
compensation in Stockholders equity at March 31, 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. For the ThreeMonths EndedMarch 31,2004
    
    2003Net income
    
    $
    6,103
    
    
    $
    4,528Foreign currency translation adjustments
    
    
    556
    
    
    
    (347
    )Comprehensive income
    
    $
    6,659
    
    
    $
    4,181
 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 for the three-month period ended March 31, 2004. The adoption of
this pronouncement did not have a material effect on the consolidated
financial statements. 2. 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: 8




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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
    
    
    
    13,125,000
    
    
    $
    0.46Effect of dilutive securities:Stock options and
restricted stock
    
    
    
    
    
    
    697,000Diluted earnings per share
    
    $
    6,103,000
    
    
    
    13,822,000
    
    
    $
    0.44
 Three months Ended March 31, 2003(in thousands, except per share data)Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income available to common
stockholders
    
    $
    4,528,000
    
    
    
    12,451,000
    
    
    $
    0.36Effect of dilutive securities:Stock options
    
    
    
    
    
    
    561,000Diluted earnings per share
    
    $
    4,528,000
    
    
    
    13,012,000
    
    
    $
    0.35
 There were no anti-dilutive shares excluded from the above calculations for
the three months ended March 31, 2004. The weighted average number of shares
excluded from the above calculations for the three months ended March 31,
2003 were approximately 306,000, as their effect would be anti-dilutive.
For the three-month periods ended March 31, 2004 and 2003, the Company had
no warrants or preferred stock outstanding. 3. 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
$509,000 and this amount has been recorded as an accrued liability at March
31, 2004. 9




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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;
    
    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; 10




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
    
    the loss of government funding for child care assistance programs;
    
    the establishment of a governmentally mandated universal child care
benefit;
    
    the availability of sites and/or licensing or zoning requirements that
may make us unable to open new centers;
    
    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 March 31, 2004, the Company managed 515 early
care and education centers, with over 50 early care and education centers
under development. During the three-month period ending March 31, 2004, the
Company opened 8 new centers and closed 2 centers. Six of the new center
openings were in the United States and 2 were in the United Kingdom. The
Company has the capacity to serve more than approximately 59,700 children in
37 states, the District of Columbia, Canada, Ireland and the United Kingdom,
and has partnerships with many leading employers, including 83 Fortune 500
companies and 50 of Working MotherMagazines 100 Best Companies for
Working Mothers in 2003. The Companys United States centers average a
capacity of 128 children per location or 56,100 in total capacity. In Europe
and Canada, center capacity averages approximately 48 children per location
or 3,600 in total capacity. As of March 31, 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. 11




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The Company currently operates 439 early care and education centers in North
America and 76 early care and education centers in the United Kingdom and
Ireland. The Company operates centers for a diversified group of clients. At March
31, 2004, the Companys early care and education centers were affiliated
with the following industries: Industry Classification
    
    Percentage of CentersConsumer
    
    
    9
    %Financial Services
    
    
    16
    %Government
    
    
    13
    %Healthcare
    
    
    11
    %Higher Education
    
    
    3
    %Industrial/Manufacturing
    
    
    6
    %Office Park Consortiums and Other
    
    
    27
    %Pharmaceutical
    
    
    6
    %Technology
    
    
    9
    %
 Although the pace of the recent economic recovery remains uncertain, the
Company was able to continue its revenue and net income growth during the
first calendar quarter 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. Several factors contributed to this performance.
Specifically, the Company continued to broaden its presence in two major
non-cyclical industries, higher education and healthcare, with the addition
of centers in the both the United States and the United Kingdom in 2004.
Barring any major changes in economic conditions, the Company is projecting
continued revenue growth through the remainder of 2004, primarily through the
addition of new early care and education centers, although the opening of new
centers is subject to a number of conditions and factors, including, among
others, the timing and pace of construction and sponsor needs. Complementing the 17% year over year revenue growth experienced during the
three-month period ended March 31, 2004, the Company also substantially
improved both operating margins and net income. The improvement is due to
several factors. First, the Company has consistently been able to increase
tuitions in advance of operating cost increases. Second, the improvement can
be attributed to the contribution of transitions of management and
acquisitions of new centers over time to the growth mix. These centers do
not have the extended ramp-up period associated with newly established P&L
model centers, which typically incur losses in the early stages of building
enrollment. Third, the Company has been successful in managing appropriate
levels of staffing in its centers. Lastly, the Company has continued to be
able to leverage its overhead as a percentage of revenue. The improvements
in operating margins were offset by losses in the Companys European
operations, which were due to investments in infrastructure and
losses from new centers in the early stage of ramp-up. The Company expects that with additional
center growth and the 12




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continued ramp up of enrollment in newer centers its European operations will
generate operating contribution in the next 18-24 months. 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. During this season, families are often on
vacation or have alternative child care arrangements. 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. management) 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-month periods ended March 31, 2004 and
2003: Three Months EndedMarch 31,2004
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    84.1
    
    
    
    84.8Gross profit
    
    
    15.9
    
    
    
    15.2Selling, general & administrative
    
    
    7.8
    
    
    
    8.2Amortization
    
    
    0.1
    
    
    
    0.1Income from operations
    
    
    8.0
    
    
    
    6.9Net Interest income
    
    
    0.0
    
    
    
    0.0Income before income taxes
    
    
    8.0
    
    
    
    6.9Income tax provisions
    
    
    3.4
    
    
    
    2.9Net income
    
    
    4.6
    %
    
    
    4.0
    %
 Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31, 2003 Revenue. Revenue increased $18.9 million, or 17%, to $131.3 million for the
three months ended March 31, 2004 from $112.4 million for the three months
ended March 31, 2003. The growth in revenues is primarily attributable to
the net addition of 39 centers since March 31, 2003, which correlates to a
9% increase in overall capacity, 13




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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 $3.8 million, or
22%, to $20.9 million for the three-month period ended March 31, 2004 from
$17.1 million for the three months ended March 31, 2003. As a percentage of
revenue, gross profit increased to 15.9% for the three months ended March
31, 2004 compared to 15.2% for the three months ended March 31, 2003. The increase in gross profit margin for the three-month period ended March
31, 2004 compared to the same period in 2003 resulted from the ability to
pace tuition increases in advance of operating cost increases, particularly
in the area of personnel costs. 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. 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 $1.1 million, or 12%, to $10.3 million
for the three months ended March 31, 2004 from $9.2 million for the three
months ended March 31, 2003. As a percentage of revenue, SGA decreased to
7.8% for the first quarter of 2004 compared to 8.2% for the same period in
2003. The dollar increase in SGA for the three-month period ended March 31, 2004
as compared to the same period in 2003 is principally 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. SGA, as a percentage of revenue,
decreased during the three-month period ended March 31, 2004, as compared to
the three-month period ended March 31, 2003, as a result of a larger revenue
base and increased overhead efficiencies. Amortization.Amortization expense on intangible assets other than goodwill
totaled $198,000 for the three-month period ended March 31, 2004, as
compared to $127,000 in the same period for 2003. 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 2003, which are subject to amortization. Income from Operations. Income from operations totaled $10.5 million for the
three- month period ended March 31, 2004, an increase of $2.7 million, or
35%, from $7.8 million in the same period for 2003. This increase is
primarily the result of the 14




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indicated revenue and gross margin improvements, as well as lower
proportionate SGA expenses. Income Tax Expense. The Companys effective income tax rate was
approximately 41.8% for the three-month period ended March 31, 2004 as
compared to an effective income tax rate of 41.9% for the same period in
2003. The tax rate is impacted by losses in certain jurisdictions for which
the Company does not record a tax benefit. 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 $46.5 million at March 31, 2004. 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 $4.5 million as of March 31,
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 $14.6 million for the three-month period
ended March 31, 2004, as compared to cash used in operations of $1.6 million
for the three-month period ended March 31, 2003. The increase in cash
provided from operations 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 (which are of a normal and
recurring nature) for the three-month period ended March 31, 2004 as
compared to the same period in 2003. Cash used in investing activities totaled $3.6 million for the three-month
period ended March 31, 2004, compared to $5.1 million in the corresponding
period in 2003. Fixed asset additions totaled $3.3 million in 2004, with
$400,000 related to new early care and education centers and the remainder
related to the refurbishment of early care and education centers.
Management expects the current level of center related fixed asset spending
to increase over the remainder of 2004 and anticipates an increased level of
spending on acquisitions, which are an element of the overall growth
strategy. Cash provided by financing activities totaled $1.5 million for the
three-month period ended March 31, 2004 as compared to $1.3 million in cash
provided by financing activities for the three-month period ended March 31,
2003. The Company received $1.7 million for stock option exercises in the
three-month period ended March 31, 2004, as compared to $.8 million in the
same period in 2003. Management believes that funds provided by operations, the Companys
existing cash and cash equivalent balances and borrowings available under
its line of credit 15




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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 for 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. 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. 16




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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: 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 2002 17




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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 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.  (b)
    
    Reports on Form 8-K The following report on Form 8-K was filed with the SEC during the
period January 1, 2004 through March 31, 2004: On February 12, 2004, the Company furnished a Form 8-K under
Item 12 related to the Companys press release announcing its
fourth quarter and fiscal 2003 earnings results. The following report on Form 8-K was filed with the SEC subsequent
to March 31, 2004 and prior to the date of this report: 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. 18




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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 7, 2004BRIGHT HORIZONS FAMILY SOLUTIONS, INC.By:
    
    /s/ Elizabeth J. BolandElizabeth J. Boland
Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)
 19