Bright Horizons Family Solutions, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
for the quarterly period ended September 30, 2006.
or
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o |
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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)
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DELAWARE
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62-1742957 |
(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.)
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200 Talcott Avenue South
Watertown, Massachusetts 02472
(Address of principal executive offices and zip code)
(617) 673-8000
(Registrants 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 þ No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date: 26,167,644 shares of common stock, $.01 par value, at November 1, 2006.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Bright Horizons Family Solutions, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
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September 30, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
7,629 |
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$ |
21,650 |
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Accounts receivable, net |
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38,103 |
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28,738 |
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Prepaid expenses and other current assets |
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16,173 |
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14,472 |
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Current deferred tax asset |
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13,372 |
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14,235 |
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Total current assets |
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75,277 |
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79,095 |
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Fixed
assets, net of accumulated depreciation of $61,702 and $54,595 at
September 30, 2006 and December 31, 2005, respectively |
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131,740 |
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116,462 |
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Goodwill, net |
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136,372 |
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120,507 |
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Other intangibles, net |
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38,752 |
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28,720 |
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Deferred tax asset, net of current portion |
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8,059 |
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6,467 |
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Other assets |
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3,152 |
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2,448 |
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Total assets |
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$ |
393,352 |
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$ |
353,699 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
614 |
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$ |
628 |
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Line of credit payable |
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20,000 |
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Accounts payable and accrued expenses |
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59,304 |
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54,478 |
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Current portion of deferred revenue |
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45,150 |
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40,018 |
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Income tax payable |
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7,010 |
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3,260 |
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Other current liabilities |
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10,398 |
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5,727 |
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Total current liabilities |
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142,476 |
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104,111 |
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Long-term debt, net of current portion |
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3,787 |
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684 |
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Accrued rent |
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9,418 |
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7,440 |
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Other long-term liabilities |
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7,421 |
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5,916 |
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Deferred revenue, net of current portion |
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13,974 |
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16,174 |
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Deferred income taxes |
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2,673 |
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2,195 |
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Total liabilities |
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179,749 |
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136,520 |
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Stockholders equity: |
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Preferred stock: 5,000,000 shares authorized, none issued or outstanding |
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Common stock: $0.01 par value |
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Authorized: 50,000,000 shares at both September 30, 2006 and December 31,
2005 |
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Issued: 27,826,000 and 27,462,000 shares at September 30, 2006 and
December 31, 2005, respectively |
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Outstanding: 26,161,000 and 27,144,000 shares at September 30, 2006 and
December 31, 2005, respectively |
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278 |
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274 |
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Additional paid-in capital |
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120,656 |
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112,511 |
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Deferred compensation |
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(1,231 |
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Treasury stock: 1,665,000 and 318,000 shares, at cost, at September 30, 2006 and
December 31, 2005, respectively |
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(58,565 |
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(11,234 |
) |
Cumulative translation adjustment |
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6,766 |
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3,155 |
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Retained earnings |
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144,468 |
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113,704 |
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Total stockholders equity |
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213,603 |
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217,179 |
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Total liabilities and stockholders equity |
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$ |
393,352 |
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$ |
353,699 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Bright Horizons Family Solutions, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues |
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$ |
172,199 |
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$ |
154,425 |
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$ |
516,570 |
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$ |
462,200 |
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Cost of services |
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138,888 |
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126,582 |
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415,062 |
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378,716 |
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Gross profit |
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33,311 |
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27,843 |
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101,508 |
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83,484 |
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Selling, general and administrative |
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15,267 |
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12,668 |
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46,287 |
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37,990 |
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Amortization |
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857 |
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442 |
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2,218 |
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1,202 |
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Income from operations |
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17,187 |
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14,733 |
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53,003 |
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44,292 |
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Interest income |
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82 |
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592 |
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372 |
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1,276 |
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Interest expense |
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(239 |
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(36 |
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(332 |
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(123 |
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Income before taxes |
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17,030 |
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15,289 |
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53,043 |
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45,445 |
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Income tax expense |
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7,131 |
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6,251 |
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22,279 |
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18,587 |
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Net income |
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$ |
9,899 |
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$ |
9,038 |
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$ |
30,764 |
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$ |
26,858 |
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Earnings per share: |
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Basic |
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$ |
0.38 |
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$ |
0.33 |
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$ |
1.16 |
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$ |
0.99 |
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Diluted |
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$ |
0.37 |
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$ |
0.32 |
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$ |
1.12 |
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$ |
0.95 |
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Weighted average number of shares outstanding: |
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Basic |
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26,008 |
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27,279 |
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26,440 |
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27,078 |
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Diluted |
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27,044 |
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28,557 |
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27,513 |
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28,380 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Bright Horizons Family Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine months ended |
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September 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
30,764 |
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$ |
26,858 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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13,495 |
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10,377 |
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Non-cash revenue and other |
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(740 |
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(956 |
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Loss on disposal of fixed assets |
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79 |
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18 |
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Stock-based compensation |
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2,625 |
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743 |
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Deferred income taxes |
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(723 |
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(368 |
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Tax benefit realized from stock option exercises |
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2,927 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(8,569 |
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(2,204 |
) |
Prepaid expenses and other current assets |
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(1,871 |
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(1,525 |
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Accounts payable and accrued expenses |
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4,213 |
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6,880 |
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Income taxes |
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4,237 |
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(116 |
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Deferred revenue |
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5,248 |
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9,570 |
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Accrued rent |
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1,953 |
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|
376 |
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Other assets |
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(692 |
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386 |
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Other current and long-term liabilities |
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310 |
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(4,119 |
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Net cash provided by operating activities |
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50,329 |
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48,847 |
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Cash flows from investing activities: |
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Additions to fixed assets, net of acquired amounts |
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(23,613 |
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(9,794 |
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Proceeds from the disposal of fixed assets |
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196 |
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Payments for acquisitions, net of cash acquired |
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(19,689 |
) |
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(56,292 |
) |
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Net cash used in investing activities |
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(43,106 |
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(66,086 |
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Cash flows from financing activities: |
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Purchase of treasury stock |
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(47,331 |
) |
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Proceeds from the issuance of common stock |
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4,329 |
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6,057 |
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Excess tax benefit from stock-based compensation |
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1,796 |
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Borrowings from line of credit, net |
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20,000 |
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Principal payments of long term debt |
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(488 |
) |
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(577 |
) |
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Net cash (used in) provided by financing activities |
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(21,694 |
) |
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5,480 |
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Effect of exchange rates on cash balances |
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450 |
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(369 |
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Net decrease in cash and cash equivalents |
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(14,021 |
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(12,128 |
) |
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Cash and cash equivalents, beginning of period |
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21,650 |
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42,472 |
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Cash and cash equivalents, end of period |
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$ |
7,629 |
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$ |
30,344 |
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Supplemental cash flow information: |
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Cash payments of interest |
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$ |
212 |
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$ |
115 |
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Cash payments of income taxes |
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$ |
16,879 |
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$ |
16,482 |
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Non cash financing activities: |
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Issuance of notes payable for acquisition |
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$ |
3,574 |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. The Company and Basis of Presentation
Organization Bright Horizons Family Solutions, Inc. (Bright Horizons or the Company) provides
workplace services for employers and families, including early care and education and strategic
work/life consulting throughout the United States, Puerto Rico, 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 categories: (i) the management or cost plus (Cost Plus)
model, where the Company manages a work-site early care and education center under a cost-plus
arrangement, typically for a single employer, and (ii) the profit and loss (P&L) model which can
be either (a) sponsored, where Bright Horizons provides early care and educational services on a
priority enrollment basis for employees of a single employer or consortium of employers, or (b) a
lease model, where the Company provides priority early care and education to the employees of
tenants located within a real estate developers property or the community at large.
Basis of Presentation The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
The accompanying financial statements have been prepared by the Company in accordance with U.S.
generally accepted accounting principles and consistent with the accounting policies described in
the Companys audited financial statements included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2005, and should be read in conjunction with the notes thereto.
In the opinion of the Companys management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments which are necessary to present fairly its financial
position at September 30, 2006, the results of its operations for the three and nine months ended
September 30, 2006 and 2005, and cash flows for the nine months ended September 30, 2006 and 2005.
Such adjustments 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 September 30, 2006, 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 Companys revenue.
Stock-Based Compensation In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123R, Share-Based Payments (SFAS 123R), which replaced SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123) and changes the Companys previous
accounting under Accounting Principles Board No. 25, Accounting for Stock Issued to Employees
(APB 25). In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) relating to the adoption of SFAS 123R.
Effective January 1, 2006, the Company adopted the provisions of SFAS 123R and SAB 107 using the
modified prospective method, which results in the provisions of SFAS 123R only being applied to the
consolidated financial statements on a go-forward basis. Under the modified prospective
6
recognition method, restatement of consolidated income from prior interim and annual periods is not
required, and accordingly, the Company has not provided such restatement for prior interim periods
or fiscal years. Under the modified prospective provisions of SFAS 123R, compensation expense is
recorded for the unvested portion of previously granted awards that remained outstanding on January
1, 2006 and all subsequent awards. This pronouncement also amends SFAS No. 95, Statement of Cash
Flows, to require that excess tax benefits related to stock-based compensation be reflected as
cash flows from financing activities rather than as cash flows from operating activities. The
balance of deferred compensation expense recorded on the balance sheet at December 31, 2005,
totaling approximately $1.2 million, which was accounted for under APB 25, was reclassified to
Additional Paid-in Capital upon implementation of the standard.
The Company has an incentive compensation plan under which it is authorized to grant both incentive
stock options and non-qualified stock options to employees and directors, as well as other
stock-based compensation. Under the terms of the 2006 Equity and Incentive Plan (the Plan), which
was approved by shareholders in June 2006, 1,750,000 shares of the Companys Common Stock were
approved for issuance. As of September 30, 2006, there were approximately 1,720,000 shares of
Common Stock available for issuance under the Plan.
Under the fair value recognition provision of SFAS 123R, stock-based compensation cost is measured
at the grant date based on the value of the award and is recognized as expense over the requisite
service period, which generally represents the vesting period. The fair value of stock options is
calculated using the Black-Scholes option-pricing model. The fair value of the Companys grants of
non-vested stock (Restricted Stock) and non-vested stock units (Restricted Stock Units) are
based on the intrinsic value. Restricted Stock and stock options granted under the Plan typically
vest over periods that range from three to five years. Stock options typically expire at the
earlier of seven to ten years from date of grant or three months after termination of the holders
employment with the Company, unless otherwise determined by the Compensation Committee of the Board
of Directors.
The Company recognized the impact of all stock-based compensation in its consolidated statements of
income, and did not capitalize any amounts on the consolidated balance sheets. The following table
presents the stock-based compensation included in the Companys consolidated statements of income
and the effect on earnings per share:
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Three months ended |
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Nine months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2006 |
|
|
|
(In thousands, except per share data) |
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
Cost of services |
|
$ |
93 |
|
|
$ |
260 |
|
Selling, general and administrative |
|
|
830 |
|
|
|
2,365 |
|
|
|
|
|
|
|
|
Stock-based compensation
before tax |
|
|
923 |
|
|
|
2,625 |
|
Income tax benefit |
|
|
264 |
|
|
|
738 |
|
|
|
|
|
|
|
|
Net compensation expense |
|
$ |
659 |
|
|
$ |
1,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on earnings per share: |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
(0.03 |
) |
|
$ |
(0.07 |
) |
Diluted earnings per share |
|
$ |
(0.02 |
) |
|
$ |
(0.07 |
) |
7
In the nine month period ended September 30, 2006 the Company recorded an excess tax benefit
related to the vesting or exercise of equity instruments of $1.8 million as cash flow from
financing activities, which prior to the adoption of FAS 123R would have been reported as cash flow
from operating activities.
Prior to the adoption of SFAS 123R and SAB 107, the Company followed APB 25, and compensation costs
related to employee stock options was generally not recognized because options are granted with
exercise prices equal to or greater than the fair market value at the date of grant. The Company
accounted for options granted to non-employees using the fair value method, in accordance with the
provisions of SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure. Had compensation costs for the stock option plans been determined based
on the fair value at the grant date for awards in 1995 through September 30, 2005, consistent with
the provisions of SFAS No. 123R, the Companys net income and earnings per share would have been
reduced to the following pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
|
|
(In thousands, except per share data) |
|
Net income: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
9,038 |
|
|
$ |
26,858 |
|
Add: Stock-based compensation
expense included in reported net
income, net of related tax effects |
|
|
147 |
|
|
|
479 |
|
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects |
|
|
(413 |
) |
|
|
(3,561 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
8,772 |
|
|
$ |
23,776 |
|
|
|
|
|
|
|
|
Earnings per share-Basic: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.33 |
|
|
$ |
0.99 |
|
Pro forma |
|
$ |
0.32 |
|
|
$ |
0.88 |
|
Earnings per share-Diluted: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.32 |
|
|
$ |
0.95 |
|
Pro forma |
|
$ |
0.31 |
|
|
$ |
0.84 |
|
There were no share-based liabilities paid during the three and nine months ended September
30, 2006 and 2005.
8
Stock Options
The fair value of each stock option granted was estimated on the date of grant using the
Black-Scholes option pricing model using the weighted average assumptions in the schedule below
(expected volatility is based upon the historical volatility of the Companys stock price). The
Company did not grant any options in the three months ended September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Expected dividend yield |
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected stock price volatility |
|
|
|
|
|
|
44.7 |
% |
|
|
41.6 |
% |
|
|
45.5 |
% |
Risk free interest rate |
|
|
|
|
|
|
4.2 |
% |
|
|
4.9 |
% |
|
|
3.4 |
% |
Expected life of options |
|
|
|
|
|
6.3 years |
|
|
6.0 years |
|
|
6.2 years |
|
Weighted-average fair value
per share of options
granted during the period |
|
|
|
|
|
$ |
19.29 |
|
|
$ |
16.96 |
|
|
$ |
16.78 |
|
Consistent with the valuation method previously used for the disclosure-only pro-forma provisions
of SFAS 123, the Black-Scholes option pricing model is used to value compensation expense on
stock-based awards under SFAS 123R. As required under the new standards, compensation expense is
based on the number of options expected to vest. Forfeitures estimated when recognizing
compensation expense are adjusted when actual forfeitures differ from the estimate.
The following table reflects stock option activity under the Companys equity plans for the nine
months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
|
Remaining |
|
|
|
|
|
|
Average |
|
|
|
Contractual |
|
|
Number of |
|
|
Exercise |
|
|
|
Life in Years |
|
|
Shares |
|
|
Price |
|
Outstanding at January 1, 2006 |
|
|
5.5 |
|
|
|
2,152,106 |
|
|
$ |
15.94 |
|
Granted |
|
|
|
|
|
|
183,810 |
|
|
|
35.34 |
|
Exercised |
|
|
|
|
|
|
(322,447 |
) |
|
|
11.94 |
|
Forfeited or Expired |
|
|
|
|
|
|
(38,258 |
) |
|
|
16.43 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
5.1 |
|
|
|
1,975,211 |
|
|
$ |
18.39 |
|
Exercisable at September 30, 2006 |
|
|
4.5 |
|
|
|
1,273,262 |
|
|
$ |
14.05 |
|
The aggregate intrinsic value (pre-tax) was $46.1 million for the Companys total outstanding
options and was $35.2 million for the Companys exercisable and fully vested options based on the
closing price of the Companys common stock of $41.73 at the end of the quarter. The aggregate
intrinsic value represents the net amount that would have been received by the option holders had
they exercised all of their outstanding options and those which were fully vested on that date.
9
The following table summarizes the non-vested stock option activity for the nine months ended
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
|
Remaining |
|
|
|
|
|
|
Average |
|
|
|
Contractual |
|
|
Number of |
|
|
Exercise |
|
|
|
Life in Years |
|
|
Shares |
|
|
Price |
|
Outstanding at January 1, 2006 |
|
|
6.5 |
|
|
|
861,506 |
|
|
$ |
19.68 |
|
Granted |
|
|
|
|
|
|
183,810 |
|
|
|
35.34 |
|
Vested |
|
|
|
|
|
|
(329,567 |
) |
|
|
13.93 |
|
Forfeited |
|
|
|
|
|
|
(13,800 |
) |
|
|
30.61 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
6.2 |
|
|
|
701,949 |
|
|
$ |
26.26 |
|
The fair value (pre-tax) of options that vested during the three and nine months ended
September 30, 2006 was $20,000 and $2.5 million, respectively. The fair value (pre-tax) of options
that vested during the three and nine months ended September 30, 2005 was $30,000 and $5.4 million,
respectively.
Aggregate intrinsic value of exercised options was $3.1 million and $8.6 million for the three and
nine months ended September 30, 2006, respectively, and $4.5 million and $13.0 million for the
three and nine months ended September 30, 2005, respectively.
As of September 30, 2006, there was $4.8 million of total unrecognized compensation cost related to
non-vested stock options granted under the Plan. That cost is expected to be recognized over a
weighted-average period of 1.2 years.
There were no modifications made to awards during the quarter ended September 30, 2006.
Cash received from options exercised under all share-based payment arrangements for the three and
nine months ended September 30, 2006 were $1.3 million and $3.8 million, respectively, and for the
three and nine months ended September 30, 2005 were $1.6 million and $5.3 million, respectively.
The actual tax benefit realized for the tax deductions from option exercises totaled $860,000 and
$2.4 million for the three and nine months ended September 30, 2006, respectively, and $600,000 and
$2.9 million for the three and nine months ended September 30, 2005, respectively.
10
Restricted Stock Awards
The Company grants shares of Restricted Stock to employees of the Company on either a no-cost or
discounted basis. The fair value of grants of Restricted Stock is based on the intrinsic value of
the shares at the grant date.
The following table summarizes the Restricted Stock activity for the nine months ended September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average Fair |
|
|
|
Shares |
|
|
Value |
|
Outstanding at January 1, 2006 |
|
|
93,100 |
|
|
$ |
21.44 |
|
Granted |
|
|
40,665 |
|
|
|
23.35 |
|
Vested |
|
|
(7,600 |
) |
|
|
23.60 |
|
Forfeited or Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
126,165 |
|
|
$ |
21.93 |
|
The aggregate intrinsic value for unvested and outstanding shares of Restricted Stock was $5.3
million based on the closing price of the Companys common stock of $41.73 at the end of the
quarter.
As of September 30, 2006, there was $1.5 million of unrecognized compensation cost related to
non-vested Restricted Stock. The cost is expected to be recognized over a weighted average period
of 1.8 years.
The Company received proceeds of approximately $500,000 and $800,000 related to discounted
purchases of Restricted Stock for the nine months ended September 30, 2006 and 2005, respectively.
The actual tax benefit realized for the tax deductions from restricted shares that vested totaled
$116,000 and $100,000 for the nine months ended September 30, 2006 and 2005, respectively.
In June 2006, the Company granted awards of Restricted Stock Units to members of the Board of
Directors. The awards allow for the issuance of a share of the Companys Common Stock for each
vested unit upon the termination of service as a member of the Board of Directors. The Company
issued approximately 1,300 units at a weighted average fair value of $34.99 for a total fair value
of approximately $50,000. The units vested upon issuance and were fully recognized as compensation
cost in the three month period ended June 30, 2006. The aggregate intrinsic value of these fully
vested awards was approximately $50,000 based on the closing price of the Companys Common Stock of
$41.73 at the end of the current quarter. The Company did not grant any Restricted Stock Units in
the three months ended September 30, 2006.
There were no modifications made to awards during the quarter ended September 30, 2006.
11
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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income |
|
$ |
9,899 |
|
|
$ |
9,038 |
|
|
$ |
30,764 |
|
|
$ |
26,858 |
|
Foreign currency
translation
adjustments |
|
|
1,448 |
|
|
|
(1,115 |
) |
|
|
3,611 |
|
|
|
(4,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
11,347 |
|
|
$ |
7,923 |
|
|
$ |
34,375 |
|
|
$ |
22,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency The assets and liabilities of the Companys subsidiaries in Canada,
Ireland, and the United Kingdom 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 subsidiaries using a
functional currency other than the U.S. dollar are included as a cumulative translation adjustment
in stockholders equity and as a component of comprehensive income.
The Companys intercompany accounts are typically denominated in the functional currency of the
foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables
that the Company considers to be of a long-term investment nature are recorded as a cumulative
translation adjustment in stockholders equity and as a component of comprehensive income, while
gains and losses resulting from the remeasurement of intercompany receivables from those
international subsidiaries for which the Company anticipates settlement in the foreseeable future
are recorded in the consolidated statements of operations. The net gains and losses recorded in the
consolidated statements of operations were not significant for the periods presented.
Recently
Issued Accounting Pronouncements In September 2006,
the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157), which addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes under generally
accepted accounting principles. The provisions of SFAS 157 are effective for fiscal years beginning
after November 15, 2007. The Company has not yet adopted this pronouncement and is currently
evaluating the expected impact that the adoption of SFAS 157 will have on its consolidated
financial position and results of operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the
accounting for uncertainty in tax positions and requires that the impact of tax positions be
recorded in the financial statements if it is more likely than not that such position will be
sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. The Company has not yet adopted this
pronouncement and is currently evaluating the expected impact that the adoption of FIN 48 will have
on its consolidated financial position and results of operations.
12
2. Acquisitions
On August 31, 2006, the Company completed the strategic acquisition of College Coach, LLC (College
Coach), a privately held provider of employer-sponsored college admissions support services with
operations in the United States. The addition of College Coach enhances the Companys service
offerings to help its client companies further support their employees and families. Bright
Horizons purchased substantially all of the assets of College Coach for consideration of $11.6
million. Additional cash consideration may be payable over the next five years, if specific
performance targets are met. Any additional payments related to this contingency will be accounted
for as additional goodwill. The purchase price has been allocated based on preliminary estimates of
the fair value of the assets and liabilities acquired at the date of acquisition. The Company
acquired assets of $2.6 million, including cash of $1.4 million, and assumed liabilities of $1.4
million. The Company recorded estimated goodwill of $400,000 and other identified intangible assets
of $10.0 million related to this transaction. The allocation of the purchase price has not been
finalized and may be different from the preliminary estimates presented above.
In September 2006, the Company acquired the outstanding stock of a group of five centers in the
United Kingdom and substantially all of the assets of a group of seven centers in the United
States. The aggregate consideration was $15.5 million, which included notes payable of $3.6 million
that were issued in conjunction with the acquisition of the centers in the United Kingdom.
Contingent consideration of $200,000 may be payable upon successfully negotiating the expansion of
one of the domestic centers acquired. The purchase prices have been allocated based on preliminary
estimates of the fair value of the assets and liabilities acquired at the dates of acquisition. The
Company acquired assets of $4.6 million, including cash of $2.5 million, and assumed liabilities of
$3.0 million. In conjunction with the two acquisitions the Company recorded estimated goodwill of
$12.4 million and other identified intangible assets of $1.5 million. The allocation of the
purchase prices has not been finalized and may be different from the preliminary estimates
presented above.
The impact of any adjustments to the final purchase price allocations for the acquisitions above
are not expected to be material to the Companys results of operations for fiscal 2006. The
acquisitions have been accounted for under the purchase method of accounting, and the results from
operations have been included in the accompanying statements of income from the date of
acquisition. These acquisitions are not material to the Companys consolidated financial position
or results of operation, and therefore no pro forma information has been presented.
3. Line of Credit
In the quarter ended September 30, 2006, the Company had periodic borrowings and repayments under
its revolving credit facility. The amount outstanding at September 30, 2006 was $20 million.
Borrowings for the period had a weighted average interest rate of 7%. At the Companys option,
advances under the revolving credit facility bear interest at either i) the greater of the Federal
Funds Rate plus 0.5% or Prime, or ii) LIBOR plus a spread depending on the Companys leverage
ratio. The Company had no outstanding amounts due on the revolving credit facility at September 30,
2005.
The Companys credit agreement provides for a five-year unsecured revolving credit facility in the
amount of $60 million, which matures on July 22, 2010, with any amounts outstanding at that date
payable in full. The revolving credit facility includes an accordion feature that allows the
Company to increase the amount of the revolving credit facility by an additional $40 million,
subject to lender commitments for the additional amounts. The Company is required to comply with
specified
13
financial ratios and tests. The Company was in compliance with all covenants at September 30, 2006
and 2005.
4. Notes Payable
In September 2006, the Company issued unsecured notes payable totaling $3.6 million to two
individuals in conjunction with the acquisition of five centers in the United Kingdom. The notes
are subject to a variable rate of interest calculated using the Base Rate in the United Kingdom
less 1.5%. Interest is payable semi-annually in April and October. The notes are due August 31,
2016.
5. Earnings Per Share
Earnings per share has been calculated in accordance with SFAS No. 128 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 (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
|
Earnings |
|
Shares |
|
Per Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders |
|
$ |
9,899 |
|
|
|
26,008 |
|
|
$ |
0.38 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
restricted stock |
|
|
|
|
|
|
1,036 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
9,899 |
|
|
|
27,044 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 |
|
|
Earnings |
|
Shares |
|
Per Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders |
|
$ |
9,038 |
|
|
|
27,279 |
|
|
$ |
0.33 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
restricted stock |
|
|
|
|
|
|
1,278 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
9,038 |
|
|
|
28,557 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
Earnings |
|
Shares |
|
Per Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders |
|
$ |
30,764 |
|
|
|
26,440 |
|
|
$ |
1.16 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
restricted stock |
|
|
|
|
|
|
1,073 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
30,764 |
|
|
|
27,513 |
|
|
$ |
1.12 |
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
Earnings |
|
Shares |
|
Per Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders |
|
$ |
26,858 |
|
|
|
27,078 |
|
|
$ |
0.99 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and
restricted stock |
|
|
|
|
|
|
1,302 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
26,858 |
|
|
|
28,380 |
|
|
$ |
0.95 |
|
|
|
|
The weighted average number of shares excluded from the above calculations for the three and
nine months ended September 30, 2006 were approximately 25,000 and 54,000, respectively, and for
the three and nine months ended September 30, 2005 were approximately 8,000 and 17,000,
respectively, as their effect would be anti-dilutive. For the three and nine months ended September
30, 2006 and 2005, the Company had no warrants or preferred stock outstanding.
6. Treasury Stock
In 1999, the Board of Directors approved a plan to repurchase up to 2,500,000 shares of the
Companys Common Stock. In June 2006, the Board of Directors approved a plan to repurchase an
additional 3,000,000 shares of the Companys Common Stock. In the three and nine months ended
September 30, 2006, the Company repurchased approximately 217,000 and 1,347,000 shares at a cost of
$7.4 million and $47.3 million, respectively, completing the total repurchases available under the
1999 plan and bringing the total repurchases under the 2006 plan to 198,000 shares. Share
repurchases under the stock repurchase program may be made from time to time in accordance with
applicable securities regulations in open market or privately negotiated transactions. The actual
number of shares purchased and cash used, as well as the timing of purchases and the prices paid,
will depend on future market conditions.
7. Commitments and Contingencies
The Company self-insures a portion of its medical insurance plans and has a high deductible workers
compensation plan. 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 Companys 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 Companys
financial condition or results of operations.
15
ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
Cautionary Statement About Forward-Looking Information
The Company has made statements in this report that constitute forward-looking statements as that
term is defined in the federal securities laws. These forward-looking statements concern the
Companys 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 Companys
expectations. Important factors that could cause actual results to differ from expectations
include:
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our inability to successfully execute our growth strategy; |
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the effects of general economic conditions and world events; |
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competitive conditions in the early care and education industry; |
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loss of key client relationships or delays in new center openings; |
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subsidy reductions by key existing clients; |
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tuition price sensitivity; |
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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; |
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the availability of a qualified labor pool, the impact of labor organization
efforts and the impact of government regulations concerning labor and employment issues; |
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federal and state regulations regarding changes in child care assistance
programs, welfare reform, minimum wages and licensing standards; |
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delays in identifying, executing or integrating key acquisitions; |
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our inability to successfully defend against or counter negative publicity
associated with claims involving alleged incidents at our centers; |
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our inability to maintain effective internal controls over financial reporting;
and |
16
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our inability to obtain insurance at the same levels or at costs comparable to
those incurred historically. |
We caution you that these risks may not be exhaustive. We operate in a continually changing
business environment and new risks emerge from time to time. You should not rely upon
forward-looking statements except as statements of our present intentions and of our present
expectations that may or may not occur. You should read these cautionary statements as being
applicable to all forward-looking statements wherever they appear. We assume no obligation to
update or revise the forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
Executive Summary and Discussion
Bright Horizons is a leading provider of workplace services for employers and families, including
early care and education and strategic work/life consulting. As of September 30, 2006, the Company
managed 629 early care and education centers, with more than 60 early care and education centers
under development and scheduled to open over the next 12-24 months. The Company has the capacity to
serve approximately 68,000 children in 41 states, the District of Columbia, Puerto Rico, Canada,
Ireland and the United Kingdom, and has partnerships with many leading employers, including more
than 95 Fortune 500 companies and 75% of Working Mother Magazines 100 Best Companies for Working
Mothers. The Companys 529 North American centers average a capacity of 118 per location, while
the 100 centers based in the United Kingdom and Ireland have a capacity of approximately 58 per
location. At September 30, 2006, approximately 60% of the Companys centers were profit and loss
(P&L) models and 40% were management (Cost Plus) models. The Company seeks to cluster centers
in geographic areas to enhance operating efficiencies and to create a leading market presence.
The Company operates centers for a diversified group of clients. At September 30, 2006, the
Companys early care and education centers were affiliated with the following industries:
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Industry Classification |
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Percentage of Centers |
Consumer |
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5 |
% |
Financial Services |
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15 |
% |
Government and Education |
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15 |
% |
Healthcare |
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10 |
% |
Industrial/Manufacturing |
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10 |
% |
Office Park Consortiums |
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30 |
% |
Pharmaceutical |
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5 |
% |
Professional Services and Other |
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5 |
% |
Technology |
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5 |
% |
The Companys overall business strategy is centered on several key elements: identifying and
executing on growth opportunities; achieving sustainable operating margin improvement;
maintaining its competitive advantage as the employer of choice in its field; and continuing
the high quality of its programs and customer satisfaction. |
The Company achieved revenue, operating income and net income growth for the three and nine month
periods ended September 30, 2006 by executing on its growth strategy to: (i) add centers for
17
new and existing clients, (ii) expand service offerings to clients, (iii) pursue strategic
acquisitions, and (iv) assume the management of existing child care centers. The alignment of key
demographic, social and workplace trends combined with an overall under supply of quality childcare
options for working families continues to fuel strong interest in the Companys services and the
Company has seen an increase in commitments from clients for new centers. In addition, the Company
has introduced enhanced service offerings such as Back Up Care Advantage and college admissions
counseling services as a way to deepen client relationships. General economic conditions and the
business climate in which individual clients operate remain the largest variables in terms of
future performance. These variables impact client capital and operating spending budgets, industry
specific sales leads and the overall sales cycle, as well as labor markets and wage rates as
competition for human capital fluctuates. Another key element of the growth strategy is expanding
relationships with existing clients, and at September 30, 2006, the Company served a total of 48
multi-site clients at 221 locations.
The Company achieved revenue growth of approximately 12% for both the three and nine month periods
ended September 30, 2006 as compared to the same periods in 2005. The Company added 21 centers and
closed 7 during the quarter ended September 30, 2006. The Company expects to close a total of 23
centers for the full year in 2006. Average capacity in closed centers of 72 per location is
somewhat below average levels due to a large number of closings taking place in the United Kingdom.
The Company, after integrating its United Kingdom-based acquisitions, has reached an operating
stage where it will continue to execute its strategy of closing centers or not renewing the
contracts of centers that do not meet the Companys operating and financial requirements; this is
reflected in an elevated number of closings in the United Kingdom in the nine months ended
September 30, 2006.
Income from operations grew by 17% and net income grew by 10% in the quarter ended September 30,
2006 as compared to the third quarter of 2005. Income from operations grew by 20% and net income
grew by 15% in the nine months ended September 30, 2006 as compared to the same period in 2005. The
improvement can be attributed to pacing tuition increases ahead of wage increases, favorable trends
and careful management of personnel costs, enrollment gains approximating 1-2% year over year in
the mature center base and the addition of mature centers through acquisitions and transitions of
management. The improvement in operating margin is also attributable to the contributions of
ChildrenFirst, Inc., whose operating results were included for less than a month upon the
completion of their acquisition in the third quarter of 2005,
compared to their being fully contributory for the three and
nine months ended September 30, 2006. The ChildrenFirst back-up centers also tend
to have higher margins, on average, than the Companys full service child care centers. The
Company improved income from operations as a percentage of revenue from 9.5% and 9.6% for the three
and nine months ended September 30, 2005, respectively, to 10.0% and 10.3% for the same periods in
2006, respectively. The opportunity to achieve additional margin improvement in the future will be
dependent upon the Companys ability to achieve the following: continued incremental enrollment
growth in our mature and ramping classes of centers; annual tuition increases above the levels of
annual average wage increases; careful cost management; and the successful integration of
acquisitions.
Finally, one of the Companys guiding principles is its focus on sustaining the high quality of its
services and programs while achieving revenue growth and increasing operating profitability. Nearly
80% of the Companys eligible domestic early care and education centers are accredited by the
National Association for the Education of Young Children (NAEYC). The Company also operates high
quality programs to achieve the accreditation standards of the Office of Standards in Education
18
(OFSTED) and National Child Nursery Association (NCNA) care standards in the United Kingdom and
Ireland, respectively.
Seasonality. The Companys business is subject to seasonal and quarterly fluctuations. Demand for
early care and education services has historically decreased during the summer months, at which
time families are often on vacation or have alternative child care arrangements. In addition,
enrollment declines as older children transition to elementary schools. Demand for the Companys
services generally increases in September and October upon the beginning of the new school year and
remains relatively stable throughout the rest of the school year. Results of operations may also
fluctuate from quarter to quarter as a result of, among other things, the performance of existing
centers that may include enrollment and staffing fluctuations, the number and timing of new center
openings and/or acquisitions, the length of time required for new centers to achieve profitability,
center closings, refurbishment or relocation, the model mix (P&L vs. Cost Plus) of new and existing
centers, the timing and level of sponsorship payments, competitive factors, and general economic
conditions.
Results of Operations
The following table sets forth certain statement of operations data as a percentage of revenue for
the three and nine months ended September 30, 2006 and 2005:
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
Net revenues |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
Cost of services |
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80.7 |
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82.0 |
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80.3 |
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81.9 |
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Gross profit |
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19.3 |
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18.0 |
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19.7 |
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18.1 |
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Selling, general & administrative |
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8.9 |
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8.2 |
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9.0 |
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8.2 |
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Amortization |
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0.4 |
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0.3 |
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0.4 |
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0.3 |
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Income from operations |
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10.0 |
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9.5 |
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10.3 |
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9.6 |
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Interest income |
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0.0 |
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0.4 |
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0.1 |
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0.2 |
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Interest expense |
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-0.1 |
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0.0 |
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-0.1 |
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0.0 |
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Income before income taxes |
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9.9 |
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9.9 |
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10.3 |
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9.8 |
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Income tax provisions |
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4.2 |
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4.0 |
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4.3 |
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4.0 |
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Net income |
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|
5.7 |
% |
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5.9 |
% |
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6.0 |
% |
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5.8 |
% |
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Three and Nine Months Ended September 30, 2006 Compared to the Three and Nine Months Ended
September 30, 2005
Revenue. Revenue increased $17.8 million, or 11.5%, to $172.2 million for the three months ended
September 30, 2006 from $154.4 million for the three months ended September 30, 2005. Revenue
increased $54.4 million, or 11.8%, to $516.6 million for the nine months ended September 30, 2006
from $462.2 million for the nine months ended September 30, 2005. The growth in revenues is
primarily attributable to the net addition of 13 child care centers since September 30, 2005,
during which period the Company opened 37 centers and closed 24, resulting in a net increase of
2.9% in overall capacity. The increase in revenue is also attributable to the ChildrenFirst, Inc.
back-up centers that were acquired September 2005. As noted above, the ChildrenFirst, Inc. centers
were contributory for less than a month in the third quarter of 2005 compared to the centers being
fully
19
contributory during the three and nine months ended September 30, 2006. Acquisitions and
transitions of management typically do not have the ramp-up period associated with organic growth,
and begin operating at more mature levels. The increase in revenue is also attributable to 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 $5.5
million, or 19.6%, to $33.3 million for the three month period ended September 30, 2006 from $27.8
million in the same period for 2005. Gross profit increased $18.0 million, or 21.6%, to $101.5
million for the nine month period ended September 30, 2006 from $83.5 million in the same period
for 2005. As a percentage of revenue, gross profit increased to 19.3% for the three months ended
September 30, 2006 compared to 18.0% for the three months ended September 30, 2005. As a percentage
of revenue, gross profit increased to 19.7% for the nine months ended September 30, 2006 compared
to 18.1% for the nine months ended September 30, 2005.
One of the key factors in the increase in gross profit margin in absolute dollars and as a
percentage of revenue for the three and nine month periods ended September 30, 2006 compared to the
same periods in 2005 is the inclusion of the ChildrenFirst network of back-up centers whose gross
margins are, on average, higher than the Companys full service child care centers. In addition,
gross profit increased due to: modest improvements in enrollment which drive operating efficiencies
at the center level as the fixed costs are absorbed over a broader tuition base; contributions from
Cost Plus centers opened over the past twelve months, transitions of management and acquisitions,
which enter the network of centers at mature operating levels; favorable trends in
personnel-related costs such as workers compensation insurance and employee benefits; and annual
tuition rate increases ahead of wage increases coupled with careful cost management at existing
programs. These increases were offset in part by losses at new lease model centers which experience
losses during the pre-opening and ramp up stages of their operations. The Company has opened 10 of
these lease model centers in 2006 and is in pre-opening development stage at additional locations.
The Companys operations are subject to seasonal variations, which typically result from higher
enrollment during the first and second quarter of each calendar year (especially among 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 (SGA). SGA consists of regional and divisional
management personnel, corporate management and administrative functions, and business development
expenses. SGA increased $2.6 million, or 20.5%, to $15.3 million for the three months ended
September 30, 2006 from $12.7 million for the three months ended September 30, 2005. SGA increased
$8.3 million, or 21.8%, to $46.3 million for the nine months ended September 30, 2006 from $38.0
million for the nine months ended September 30, 2005. As a percentage of revenue, SGA increased to
8.9% and 9.0% for the three and nine month periods ended September 30, 2006, respectively, compared
to 8.2% for both for the three and nine month periods ended September 30, 2005.
The dollar increase in SGA in the third quarter of 2006 compared to the same period in 2005 is
primarily related to the adoption of SFAS 123R, which required the recognition of stock-based
compensation resulting in incremental SGA expense of approximately $600,000 and $1.7 million for
20
the three and nine months ended September 30, 2006, respectively. In addition, SGA costs necessary
for the support of the acquired ChildrenFirst back-up network added approximately $1.0 million and
$3.7 million in overall costs for the three and nine month periods ended September 30, 2006,
respectively. Other spending consisted of regional and divisional operations management, as well
as corporate and administrative personnel necessary to support existing business, new growth
opportunities and increased cost of regulatory compliance.
The Company anticipates the incremental full year impact in 2006 related to the adoption of SFAS
123R to approximate $2.4 million in SGA and $400,000 in cost of services.
Amortization. Amortization expense on intangible assets other than goodwill totaled $857,000 and
$2.2 million for the three and nine months ended September 30, 2006, respectively, compared to
$442,000 and $1.2 million for the same periods in 2005, respectively. The increase relates to the
addition of certain trade names, non-compete agreements, customer relationships and contract rights
arising from acquisitions the Company completed during 2005 and 2006, which are subject to
amortization. The Company anticipates amortization expense to approximate $3.4 million for the full
year 2006, including the effects of acquisitions completed in the third quarter of 2006.
Income from Operations. Income from operations totaled $17.2 million for the three months ended
September 30, 2006, an increase of $2.5 million, or 16.7%, from $14.7 million in the same period
for 2005. Income from operations totaled $53.0 million for the nine months ended September 30,
2006, an increase of $8.7 million, or 19.7%, from $44.3 million in the same period for 2005. This
increase is primarily the result of the indicated revenue and gross margin improvements, offset
somewhat by higher SGA expenses.
Interest Income and Expense. Interest income totaled $82,000 and $372,000 for the three and nine
months ended September 30, 2006, respectively, compared to $592,000 and $1.3 million in the same
periods for 2005, respectively. The decrease in interest income is largely due to lower cash
balances resulting from payments for acquisitions and stock repurchases over the last twelve
months.
Interest expense totaled $239,000 and $332,000 for the three and nine months ended September 30,
2006, respectively, compared to $36,000 and $123,000 in the same periods for 2005, respectively.
The increase in interest expense is largely due to borrowings from the line of credit.
Income Tax Expense. The Companys effective income tax rate was approximately 41.9% and 42.0% for
the three and nine months ended September 30, 2006, respectively, compared to an effective income
tax rate of 40.9% for the three and nine months ended September 30, 2005. The increase in the tax
rate is largely due to the non-deductibility associated with certain options being expensed under
SFAS 123R.
Liquidity and Capital Resources
The Companys 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 Companys
primary sources of liquidity have been cash flow from operations and existing cash balances, which
were $7.6 million at September 30, 2006. The Companys cash balances are supplemented by borrowings
available under the Companys $60 million line of credit. The Company had outstanding borrowings of
$20 million against its line of credit at September 30, 2006. The Company had a working capital
deficit of $67.2 million as of September 30, 2006 and a working capital deficit of $25.0 million at
December 31, 2005, arising primarily from long-term
21
investments in fixed assets and acquisitions, as well as purchases of the Companys common stock.
The Company anticipates that it will continue to generate positive cash flows from operating
activities for the remainder of 2006 and that the cash generated will be used principally to fund
ongoing operations of its new and existing early care and education
centers, as well as to repay
amounts outstanding under its line of credit.
Cash provided from operations was $50.3 million for the nine months ended September 30, 2006
compared to cash provided from operations of $48.8 million for the nine months ended September 30,
2005. The increase in cash provided from operations is primarily the result of increases in net
income and other non-cash expenses (primarily depreciation, amortization and stock-based
compensation) as well as increases in income taxes payable. These amounts were offset by increases
in accounts receivable, which was primarily due to the timing and amount of payments and are of a
normal and recurring nature. Lastly, cash provided from deferred revenue balances are less than
the comparable period in 2005 due to the timing of receipts and the amortization of balances for
long-term arrangements.
Cash used in investing activities totaled $43.1 million for the nine months ended September 30,
2006 compared to $66.1 million in the corresponding period in 2005. Fixed asset additions totaled
$23.6 million in 2006, with $17.5 million related to new early care and education centers and the
remainder being primarily related to the refurbishment of early care and education centers. Cash
paid for acquisitions totaled $19.7 million for the nine months ended September 30, 2006 compared
to $56.3 million for the same period in 2005.
Cash used in financing activities totaled $21.7 million for the nine months ended September 30,
2006 compared to cash provided by financing activities of $5.5 million for the nine months ended
September 30, 2005. In the nine months ended September 30, 2006, the Company repurchased
approximately 1,347,000 shares of its common stock at a cost of approximately $47.3 million. The
Company received $4.3 million in proceeds from the issuance of restricted stock and the exercise of
stock options in the nine months ended September 30, 2006, compared to $6.1 million for the same
period in 2005. Additionally, upon the adoption of SFAS 123R the Company recorded an excess tax
benefit related to the vesting or exercise of equity instruments of $1.8 million that had been
previously reported as a cash flow from operating activities. The Company also had net borrowings
of $20 million from its line of credit in 2006.
In 1999, the Board of Directors approved a plan to repurchase up to 2,500,000 shares of the
Companys Common Stock. In June 2006, the Board of Directors approved a plan to repurchase an
additional 3,000,000 shares of the Companys Common Stock. In the three and nine months ended
September 30, 2006, the Company repurchased approximately 217,000 and 1,347,000 shares at a cost of
$7.4 million and $47.3 million, respectively, completing the total repurchases available under the
1999 plan and bringing the total repurchases under the 2006 plan to 198,000 shares. Share
repurchases under the stock repurchase program may be made from time to time in accordance with
applicable securities regulations in open market or privately negotiated transactions. The actual
number of shares purchased and cash used, as well as the timing of purchases and the prices paid,
will depend on future market conditions.
Management believes that funds provided by operations, the Companys existing cash and cash
equivalent balances and borrowings available under its line of credit will be adequate to meet
planned operating and capital expenditures for at least the next twelve months. However, if the
Company were to make any significant acquisitions 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
22
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
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
addresses how companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted accounting principles. The
provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The
Company has not yet adopted this pronouncement and is currently evaluating the expected impact that
the adoption of SFAS 157 will have on its consolidated financial position and results of
operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the
accounting for uncertainty in tax positions and requires that the impact of tax positions be
recorded in the financial statements if it is more likely than not that such position will be
sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. The Company has not yet adopted this
pronouncement and is currently evaluating the expected impact that the adoption of FIN 48 will have
on its consolidated financial position and results of operations.
Critical Accounting Policies and Estimates
In the Companys 2005 Annual Report on Form 10-K, the Company identified the critical accounting
policies upon which the consolidated financial statements were prepared as those relating to
revenue recognition, accounts receivable, goodwill and other intangibles, liability for insurance
obligations and income taxes. The Company has reviewed its policies and determined that these
remain the critical accounting policies for the quarter ended September 30, 2006. The Company did
not make any significant changes to these policies during 2006.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
There have been no material changes in the Companys 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 Companys Annual Report on Form 10-K for the year ended
December 31, 2005.
Foreign Currency Exchange Rate Risk
There have been no changes in the Companys foreign operations that would materially alter the
disclosures on foreign currency exchange risk made in the Companys Annual Report on Form 10-K for
the year ended December 31, 2005.
23
ITEM 4. Controls and Procedures
(a) Disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding required financial
disclosure.
The Company conducted an evaluation, under the supervision and with the participation of the
Companys Disclosure Committee and management, including the CEO and CFO, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures as defined under Rules
13a-15(b), promulgated under the Exchange Act. Based upon this evaluation, the CEO and CFO have
concluded that the Companys disclosure controls and procedures were effective as of September 30,
2006 and December 31, 2005.
(b) Changes in internal control over financial reporting
There were no changes in the Companys internal control over financial reporting during its most
recently completed fiscal quarter that have materially affected or are reasonably likely to
materially affect the Companys internal control over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 1A. Risk Factors
There have been no material changes in our Risk Factors as previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2005.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
In 1999, the Board of Directors approved a plan to repurchase up to 2,500,000 shares of the
Companys Common Stock. In June 2006, the Board of Directors approved a plan to repurchase an
additional 3,000,000 shares of the Companys Common Stock. As of September 30, 2006, all shares
approved under the 1999 plan had been repurchased and 198,000 shares of the shares approved under
the 2006 plan had been repurchased. The following table presents the repurchases for the three
months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Shares |
|
Shares that May Yet |
|
|
Total Number |
|
|
|
|
|
Purchased as Part of |
|
Be Purchased Under |
|
|
of Shares |
|
Average Price |
|
Publicly Announced |
|
the Plans or |
Period |
|
Purchased |
|
Paid per Share |
|
Plans or Programs |
|
Programs |
|
July 1-31, 2006 |
|
|
217,352 |
|
|
$ |
33.81 |
|
|
|
2,698,446 |
|
|
|
2,801,554 |
|
August 1-31, 2006 |
|
|
|
|
|
|
|
|
|
|
2,698,446 |
|
|
|
2,801,554 |
|
September 1-30, 2006 |
|
|
|
|
|
|
|
|
|
|
2,698,446 |
|
|
|
2,801,554 |
|
|
|
|
Total |
|
|
217,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchases under the stock repurchase program may be made from time to time in
accordance with applicable securities regulations in open market or privately negotiated
transactions. The actual number of shares purchased and cash used, as well as the timing of
purchases and the prices paid, will depend on future market conditions.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
Not applicable
25
ITEM 6. Exhibits
Exhibits:
|
|
|
|
|
|
31.1 |
|
|
Certification of the Companys 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 Companys 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 Companys 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 Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
26
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: November 9, 2006
|
|
|
|
|
BRIGHT HORIZONS FAMILY SOLUTIONS, INC. |
|
|
|
|
|
|
|
By:
|
|
/s/ Elizabeth J. Boland |
|
|
|
|
|
|
|
|
|
Elizabeth J. Boland |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Duly Authorized Officer and Principal Financial Officer) |
|
|
27