Overview
Dr. Gasper Lazzara, Jr. and Bartholomew F. Palmisano, Sr. established our business in 1985. At December 31, 2000, we provided integrated business services to 592 orthodontic centers with 395 affiliated orthodontists throughout the United States and in Japan, Mexico and Puerto Rico.
     During 2000, our net revenue increased 18.8% to $268.8 million, from $226.3 million in 1999. Our net income before the cumulative effect of a change in accounting principle increased 2.5% during 2000 to $47.7 million, which excluded the effects of a $50.6 million charge, net of tax benefit, taken in 2000 to reflect the cumulative effect of a change in accounting principle related to revenue recognition, from $46.5 million in 1999, which excluded the effects of a $678,000 charge, net of tax benefit, taken in 1999 to reflect the cumulative effect of a change in accounting principle related to start-up activities.
     During 2000, our affiliated orthodontists initiated treatment of about 160,639 patients, an increase of 27.2% from about 126,307 patients during 1999, representing initial new patient contract balances of $494.1 million for 2000, an increase of 33.9% from $369.1 million for 1999. As of December 31, 2000, our affiliated orthodontists were treating a total of about 343,373 patients, an increase of 28.1% from about 267,965 patients at December 31, 1999.
     The following table provides information about the growth in the number of our affiliated orthodontic centers for the periods shown:
Year Ended December 31,
    1996    1997      1998      1999    2000  
Number of centers at
 beginning of period 145 247 360 469 537
Number of centers
 developed during period 53 58 54 36 18
Number of centers
 acquired during period 68 78 66 32 45
Number of centers
 consolidated during period (19 )  (23 )  (11 )  — (8 ) 
Number of centers
 at end of period 247 360 469 537 592

    Of the 592 orthodontic centers at December 31, 2000, 306 were developed by us and 361 were existing orthodontic practices whose assets we acquired, of which 75 were consolidated into another orthodontic center. We expect that future growth in the number of our affiliated orthodontic centers will come from both developing orthodontic centers with existing and newly recruited orthodontists and acquiring the assets of, and affiliating with, existing orthodontic practices.
     Generally, when we develop a new orthodontic center, all patients treated at the orthodontic center are new patients and, in the first several months after commencing operations, the orthodontic center is open only for a limited number of days each month as new patients are added. Our affiliated orthodontic centers have generally become increasingly more productive and profitable as more new patients are added and existing patients return for monthly follow-up visits. After 26 months of operations, an orthodontic center’s growth in patient base has typically begun to stabilize as the initial patients complete treatment. At that point, an orthodontic center can increase the number of patients treated by improving the efficiency of its clinical staff, increasing patient treatment intervals and adding operating days or orthodontists. Our affiliated orthodontic centers may also increase revenue by implementing periodic price increases. Established practices with which we have affiliated have typically increased their revenue by applying our operating strategies and systems, including increased advertising and efficient patient scheduling.

Agreements with Affiliated Orthodontists
We provide a wide range of services to our affiliated orthodontists under either a service agreement or a consulting agreement. The specific form of the agreement is based upon the dental regulatory provisions of the particular state in which an orthodontic center is located. The service agreement is used in the majority of states, with some minor variations from state to state. The consulting agreement, also with some variations from state to state, is used in states with particularly stringent laws relating to the practice of dentistry. We enter into a separate service or consulting agreement with each affiliated orthodontic practice owner. If an affiliated orthodontist operates his or her practice through a professional corporation or association or other similar entity, that entity is a party to the agreement, as well as the affiliated orthodontist.
     Under the service agreement, we provide our affiliated orthodontists with a comprehensive range of business services in exchange for monthly service fees, which are described in “Revenue Recognition” below. The types of services we provide to affiliated orthodontists under the consulting agreements are generally similar to the services we provide under the service agreements. However, rather than being based on a percentage of patient contract balances, the service fees paid to us by the affiliated orthodontists under the consulting agreements are a combination of, depending on the service being performed, “cost-plus” types of fees, flat monthly fees and hourly fees. Among other differences from the service agreements, some consulting agreements have shorter terms than the service agreements, some do not give us a right to purchase the orthodontist’s interest in the practice assets following termination, no matter the reason, and some require more limited non-competition agreements from the affiliated orthodontist after termination of the consulting agreement than do most of the service agreements. In addition, the consulting agreements emphasize that the affiliated orthodontist has ultimate control and authority over his or her practice’s business management, including such matters as advertising, hiring and termination of staff and the purchase of equipment and supplies.
     During 2000, net revenue that was attributable to service agreements totaled $256.7 million, or 95.5% of net revenue, and net revenue that was attributable to consulting agreements totaled $12.1 million, or 4.5% of net revenue. During 1999, net revenue that was attributable to service agreements totaled 95.7% of net revenue, and net revenue that was attributable to consulting agreements totaled 4.3% of net revenue. During 1998, net revenue that was attributable to service agreements totaled 95.3% of net revenue, and net revenue that was attributable to consulting agreements totaled 4.7% of net revenue.
     During 2000, the operating margin, or operating profit as a percentage of net revenue, for net revenue attributable to service agreements was comparable to that for net revenue attributable to consulting agreements, with an operating margin for net revenue attributable to service agreements of 29.8% and an operating margin for net revenue attributable to consulting agreements of 29.3%. During 1999, the operating margin for net revenue attributable to service agreements was 34.3% and the operating margin for net revenue attributable to consulting agreements was 26.6%, due to the addition of new orthodontic centers affiliated under consulting agreements that were not operating at full capacity. During 1998, the operating margin for net revenue attributable to service agreements was 32.7% and the operating margin for net revenue attributable to consulting agreements was 12.0%, due to the addition of new orthodontic centers affiliated under consulting agreements that were not operating at full capacity. The change in operating margin from 1999 to 2000 was primarily due to the effect on net revenue for 2000 from our change in net revenue recognition policy effective January 1, 2000. See “ Results of Operations” below.

Revenue Recognition
Effective January 1, 2000, we changed our net revenue recognition pursuant to Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). SAB 101 summarizes certain of the Securities and Exchange Commission staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements.
     Effective January 1, 2000, we recognize net revenue based on a straight-line allocation of patient contract revenue over the terms of the patient contracts (which average about 26 months), minus the portion of that straight-line allocation retained or to be retained by our affiliated orthodontists. Amounts retained or to be retained by an affiliated orthodontist are estimated using the percentage of practice operating profits that may be retained by the orthodontist under his or her service agreement. Amounts retained or that may be retained by an affiliated orthodontist equal the orthodontist’s proportionate share of the straight-line allocation of patient contract revenue that is collected during the relevant period and the orthodontist’s proportionate share of patient receivables representing any remaining portion of that allocation, minus any operating losses, depreciation, interest on outstanding loans, bad debt or other expenses that we have incurred but for which we have not been reimbursed by the orthodontist. These unreimbursed expenses reduce amounts retained by an affiliated orthodontist only up to the amounts that would otherwise be retained by the orthodontist. Any remaining unreimbursed expenses would reduce amounts retained or to be retained by the orthodontist in subsequent periods.
     The cumulative effect of this change in accounting principle was about $50.6 million, net of income tax, which is reflected in our results of operations for 2000. The cumulative effect of the change was also reflected in a reduction in service fee receivables, net of allowance for uncollectible amounts, to $35.4 million as of December 31, 2000 from $87.6 million as of December 31, 1999. The pro forma net income amounts presented in “Item 6. Selected Financial and Operating Data” and in our consolidated statement of operations were calculated assuming that the change in accounting principle pursuant to SAB 101 was effective throughout all periods presented.
     For periods prior to January 1, 2000, we recognized net revenue consistent with the proportion of services that we provide our affiliated orthodontists during the term of a patient’s course of treatment and the general terms of our service agreements with affiliated orthodontists. We believe that at least 24% of the services we and our employees, including orthodontic assistants and other center staff, provide our affiliated orthodontists, including staffing, supplies and inventory, computer and management information systems, scheduling, billing and accounting services relate to the first month of the term of our affiliated orthodontists’ patient contracts. Our service agreements generally provide for monthly service fees based upon the result of approximately 24% of each new patient contract balance during the first month of the term of the patient contract, plus the balance of the patient contract balance allocated equally over the remaining term of the patient contract (which averages 26 months), minus amounts retained by the affiliated orthodontist. The amounts retained by an affiliated orthodontist are based on a percentage of the operating profit of the orthodontist’s practice on a cash basis, generally cash collections minus expenses during the period. Amounts retained by an affiliated orthodontist who operates a newly developed orthodontic center are typically reduced by operating losses on a cash basis because of start-up expenses. For periods prior to January 1, 2000, we recognized net revenue attributable to an affiliated orthodontist’s share of these operating losses in the period during which the operating losses were incurred, with such net revenue totaling about $4.0 million during 1999 and $4.7 million during 1998.

Expenses
Operating expenses of our affiliated orthodontic centers are our expenses and are recognized as incurred. Employee costs consist of wages, salaries and benefits paid to all of our employees, including orthodontic assistants, business staff and management personnel. General and administrative expenses consist of provision for losses on receivables, professional service fees, maintenance and utility costs, office supply expense, telephone expense, taxes, license fees, printing expense and shipping expense.

Emerging Issues Task Force Issue No. 97-2
We do not have a controlling financial interest in our affiliated orthodontists’ practices. In accordance with guidance in Emerging Issues Task Force No. 97-2, we do not consolidate the patient revenue and other operations and accounts of our affiliated orthodontists within our financial statements.

Results of Operations
The following table provides information about the percentage of net revenue represented by some of the items in our consolidated statements of income. Information for 2000 includes the effect of the change in revenue recognition we adopted effective January 1, 2000.
Year Ended December 31,
     1998    1999    2000
Net revenue 100.0 % 100.0 % 100.0 %
Direct expenses:
  Employee costs 27.4 27.1 29.0
  Orthodontic supplies 7.8 7.6 7.9
  Rent 8.2 8.2 8.9
  Marketing and advertising 9.0 7.5 8.2
    Total direct expenses 52.4 50.4 54.0
General and administrative 10.6 10.3 10.6
Depreciation and amortization 5.3 5.4 5.6
Operating profit 31.7 33.9 29.8
Interest (income) expense (0.2 ) 1.0 1.4
Income before income taxes 31.9 32.9 28.4
Provision for income taxes 12.2 12.5 10.6
Income before cumulative
 effect of changes in
 accounting principles 19.7 20.4 17.8
Cumulative effect of changes
 in accounting principles, net
 of income tax benefit — 0.2 (18.8 )
Net income (loss) 19.7 % 20.4 % (1.0 )%

2000 Compared to 1999
Net Revenue. Net revenue increased $42.5 million, or 18.8%, to $268.8 million for 2000 from $226.3 million for 1999. We attribute $28.8 million of this increase to the growth in net revenue of orthodontic centers open throughout both periods and $13.7 million of this increase to orthodontic centers opened since January 1, 1999. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, net revenue increased $63.2 million, or 30.7%, to $268.8 million for 2000 from $205.6 million for 1999. The number of patient contracts increased to about 343,370 at December 31, 2000 from about 267,965 at December 31, 1999.
     Employee Costs. Employee costs increased $16.9 million, or 27.6%, to $78.1 million for 2000 from $61.2 million for 1999. As a percentage of net revenue, employee costs increased to 29.0% for 2000 from 27.1% for 1999, due to the effect on net revenue for 2000 from our change in net revenue recognition policy effective January 1, 2000 pursuant to SAB 101, which offset capacity efficiencies achieved through general changes to patient treatment schedules by our affiliated orthodontists which resulted in fewer treatments per patient contract and lower employee costs per patient. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, employee costs decreased as a percentage of net revenue to 29.0% for 2000 from 29.8% for 1999, due to capacity efficiencies achieved through general changes to patient treatment schedules by our affiliated orthodontists which resulted in fewer treatments per patient contract and lower employee costs per patient.
     As a result of developments in orthodontic technology, a patient may be seen every six to eight weeks, rather than the traditional four weeks, without compromising quality of care. Consistent with industry trends, our affiliated orthodontists have begun increasing the intervals between patient treatments. During 2000, patients in our affiliated orthodontic centers averaged 43.6 days between office visits, compared to an average of 39.3 days during 1999. This increase in patient treatment interval reduces the number of office visits during the term of a patient’s treatment, which continues to average about 26 months, and results in lower employee costs per patient. The increased interval does not, however, reduce the amount of treatment fees per patient. Therefore, the increased interval reduces the employee costs incurred with respect to an individual patient relative to the patient’s treatment fee.
     Orthodontic Supplies. Orthodontic supplies expense increased $4.1 million, or 24.0%, to $21.2 million for 2000 from $17.1 million for 1999. As a percentage of net revenue, orthodontic supplies expense increased to 7.9% for 2000 from 7.6% for 1999, due to the effect on net revenue for 2000 from our change in revenue recognition effective January 1, 2000 pursuant to SAB 101, which offset cost improvements attained through bulk purchasing and our proprietary inventory control and ordering system. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effecti ve January 1, 2000 had been in effect throughout 1999 and 2000, orthodontic supplies expense, as a percentage of net revenue, decreased to 7.9% for 2000 from 8.3% for 1999.
     Rent. Rent expense increased $5.4 million, or 29.0%, to $24.0 million for 2000 from $18.6 million for 1999. We attribute the increase in this expense to orthodontic centers affiliated, opened or relocated after 1999. As a percentage of net revenue, rent expense increased to 8.9% for 2000 from 8.2% for 1999. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, rent expense decreased slightly as a percentage of net revenue to 8.9% for 2000 from 9.1% for 1999.
     Marketing and Advertising. Marketing and advertising expense increased $5.1 million, or 30.2%, to $22.0 million for 2000 from $16.9 million for 1999. The increase in this expense resulted primarily from increases in marketing and advertising related to growth in net revenue for existing orthodontic centers as well as marketing and advertising for orthodontic centers added after 1999. As a percentage of net revenue, marketing and advertising expense increased to 8.2% for 2000 from 7.5% for 1999, due to the effect on net revenue for 2000 from our change in net revenue recognition effective January 1, 2000 pursuant to SAB 101. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, marketing and advertising expense, as a percentage of net revenue, remained constant at 8.2% for 2000 and 1999.
     General and Administrative. General and administrative expense increased $5.1 million, or 21.8%, to $28.4 million for 2000 from $23.3 million for 1999. The increase in general and administrative expense resulted primarily from the addition of orthodontic centers and increases in our affiliated orthodontists’ patient base after 1999. As a percentage of net revenue, general and administrative expense increased to 10.6% for 2000 from 10.3% for 1999 due to the effect on net revenue for 2000 from our change in revenue recognition policy effective January 1, 2000 pursuant to SAB 101. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, general and administrative expense decreased as a percentage of net revenue to 10.6% for 2000 from 11.7% for 1999.
     Depreciation and Amortization. Depreciation and amortization expense increased $2.9 million, or 23.9%, to $15.2 million for 2000 from $12.2 million for 1999. The increase in this expense is a result of the fixed assets acquired and service agreements entered into for orthodontic centers developed, acquired or relocated after 1999. As a percentage of net revenue, depreciation and amortization expense increased to 5.6% for 2000 from 5.4% for 1999. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, depreciation and amortization expense decreased as a percentage of net revenue to 5.6% for 2000 from 6.0% for 1999.
     Operating Profit. Operating profit increased $3.1 million, or 4.0%, to $80.0 million for 2000 from $76.9 million for 1999. As a percentage of net revenue, operating profit decreased to 29.8% for 2000 from 33.9% for 1999 as a result of the factors discussed above. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, operating profit increased $25.6 million, or 47.0%, to $80.0 million for 2000 from $55.4 million for 1999, and increased as a percentage of net revenue to 29.8% for 2000 from 27.0% for 1999, as a result of the factors discussed above.
     Interest. Net interest expense increased $1.5 million, or 69.3%, to $3.7 million for 2000 from $2.2 million for 1999. As a percentage of net revenue, net interest expense increased to 1.4% for 2000 from 1.0% for 1999. The increase in this expense resulted from an increase since 1999 in the average balance of borrowings under our $100 million revolving line of credit associated with expansion in new and existing markets and an increase in the average interest rate charged for those borrowings. The increase in net interest expense as a percentage of revenue was also due to the effect on net revenue for 2000 from our change in net revenue recognition effective January 1, 2000 pursuant to SAB 101. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, net interest expense increased as a percentage of net revenue to 1.4% for 2000 from 1.2% for 1999, due to an increase since 1999 in the average balance of borrowings under our $100 million revolving line of credit associated with expansion in new and existing markets and an increase in the average interest rate charged for those borrowings.
     Provision for Income Taxes. Provision for income taxes increased $343,000, or 1.2%, to $28.6 million for 2000 from $28.2 million for 1999. Our effective income tax rate was 37.8% for 2000 and 1999. Our change in accounting principle pursuant to SAB 101 effective January 1, 2000 resulted in deferred tax assets of $41.1 million, because we have not received approval from taxing authorities to change our tax accounting method of recognizing revenue. We cannot assure you that we will receive any such approval. Failure to obtain this approval could have an adverse effect on our cash flow from operating activities. We have provided no valuation allowance for deferred tax assets. We believe that the deferred tax assets at December 31, 2000 are realizable through carrybacks and future reversals of existing taxable temporary differences. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, provision for income taxes increased $8.6 million, or 43.0%, to $28.6 million for 2000 from $20.0 million for 1999.
     Cumulative Effect of a Change in Accounting Principle. During 2000, we recorded a cumulative effect of a change in accounting principle of $50.6 million, net of an income tax benefit of $30.6 million, with respect to our change in revenue recognition effective as of January 1, 2000 pursuant to SAB 101. During 1999, we recorded a cumulative effect of a change in accounting principle of $678,000, net of an income tax benefit of $410,000, with respect to our adoption in 1999 of Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities.”
     Net Income (Loss). Net income (loss) decreased $48.6 million, or 106.2%, to a net loss of $2.8 million for 2000 from net income of $45.8 million for 1999, primarily due to the cumulative effect of our change in accounting principle during 2000 pursuant to SAB 101. As a percentage of net revenue, the net loss for 2000 was (1.0)% as compared to 20.4% for net income for 1999, as a result of the factors discussed above. On a pro forma basis, calculated as if our change in accounting principle pursuant to SAB 101 effective January 1, 2000 had been in effect throughout 1999 and 2000, net income, excluding the cumulative effects of changes in accounting principles, increased $14.7 million, or 44.5%, to $47.7 million for 2000 from $33.0 million for 1999, and increased as a percentage of net revenue to 17.9% for 2000 from 16.1% for 1999, as a result of the factors discussed above.

1999 Compared to 1998
Net Revenue. Net revenue increased $55.0 million, or 32.1%, to $226.3 million for 1999 from $171.3 million for 1998. We attribute $31.0 million of this increase to the growth in net revenue of orthodontic centers open throughout 1998 and 1999, and $24.0 million of this increase to orthodontic centers opened since January 1, 1998. The number of patient contracts increased to about 268,000 at December 31, 1999 from about 195,000 at December 31, 1998.
     Employee Costs. Employee costs increased $14.3 million, or 30.6%, to $61.2 million for 1999 from $46.9 million for 1998. As a percentage of net revenue, however, employee costs decreased to 27.1% for 1999 from 27.4% for 1998. The percentage decrease primarily reflects efficiencies achieved through a general change to longer patient treatment intervals by our affiliated orthodontists, which resulted in fewer treatments per patient contract and lower employee costs per patient.
     As a result of developments in orthodontic technology, a patient may be seen every six to eight weeks, rather than the traditional four weeks, without compromising quality of care. Consistent with industry trends, our affiliated orthodontists have begun increasing the intervals between patient treatments. During 1999, patients in our affiliated orthodontic centers averaged 39.3 days between office visits, compared to an average of 36.6 days during 1998. This increase in patient treatment interval reduces the number of office visits during the term of a patient’s treatment, which continues to average about 26 months, and results in lower employee costs per patient. The increased interval does not, however, reduce the amount of treatment fees per patient. Therefore, the increased interval reduces the employee costs incurred with respect to an individual patient relative to the patient’s treatment fee.
     Orthodontic Supplies. Orthodontic supplies expense increased $3.8 million, or 29.0%, to $17.1 million for 1999 from $13.3 million for 1998. As a percentage of net revenue, however, orthodontic supplies expense decreased to 7.6% for 1999 from 7.8% for 1998. Cost improvements attained through bulk purchasing were partially offset by increased expense associated with an increased percentage of new patient treatment days, which require greater orthodontic supplies per patient, associated with the opening of additional orthodontic centers.
     Rent. Rent expense increased $4.5 million, or 31.8%, to $18.6 million for 1999 from $14.1 million for 1998. We attribute the increase in this expense to orthodontic centers affiliated, opened or relocated after 1998. As a percentage of net revenue, however, rent remained constant at 8.2% for 1998 and 1999.
     Marketing and Advertising. Marketing and advertising expense increased $1.4 million, or 8.9%, to $16.9 million for 1999 from $15.5 million for 1998. The increase in this expense resulted primarily from increases in marketing and advertising related to growth in net revenue for existing orthodontic centers as well as marketing and advertising for orthodontic centers added after 1998. As a percentage of net revenue, however, marketing and advertising expense decreased to 7.5% for 1999 from 9.0% for 1998. We attribute the decrease in this expense as a percentage of net revenue to changes in our marketing department designed to eliminate costs not related to the purchase of media advertisements.
     General and Administrative. General and administrative expense increased $5.2 million, or 28.5%, to $23.3 million for 1999 from $18.1 million for 1998. The increase in general and administrative expense resulted primarily from the addition of orthodontic centers after 1998. As a percentage of net revenue, however, general and administrative expense decreased to 10.3% for 1999 from 10.6% for 1998. General and administrative expense decreased as a percentage of net revenue as a result of lower average start-up costs for orthodontic centers developed after 1998.
     Depreciation and Amortization. Depreciation and amortization expense increased $3.1 million, or 34.1%, to $12.2 million for 1999 from $9.1 million for 1998. As a percentage of net revenue, depreciation and amortization expense increased to 5.4% for 1999 from 5.3% for 1998. The increase in this expense is a result of the fixed assets acquired and service agreements entered into for orthodontic centers developed, acquired or relocated after 1998.
     Operating Profit. Operating profit increased $22.6 million, or 41.7%, to $76.9 million for 1999 from $54.3 million for 1998. As a percentage of net revenue, operating profit increased to 33.9% for 1999 from 31.7% for 1998 as a result of the factors discussed above.
     Interest. We incurred net interest expense of $2.2 million for 1999, compared to net interest income of $280,000 for 1998. The increase in net interest expense resulted from the interest incurred on borrowings under our $100.0 million revolving line of credit associated with expansion in new and existing markets.
     Provision for Income Taxes. Provision for income taxes increased $7.4 million, or 35.9%, to $28.2 million for 1999 from $20.8 million for 1998. Our effective income tax rate was 37.8% for 1999 and 1998.
     Cumulative Effect of Change in Accounting Principle. During 1999, we recorded a cumulative effect of a change in accounting principle of $678,000, net of an income tax benefit of $410,000, with respect to our adoption in 1999 of Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities.”
     Net Income. Net income increased $12.0 million, or 35.6%, to $45.8 million for 1999 from $33.8 million for 1998. As a percentage of net revenue, net income increased to 20.4% for 1999 from 19.7% for 1998 as a result of the factors discussed above.

Quarterly Operating Results
The following table provides information about our unaudited quarterly operating results for 1999 and 2000. We believe that the following information includes all of the adjustments considered necessary for a fair presentation of our consolidated financial position and our consolidated results of operations for these periods in accordance with generally accepted accounting principles. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.

Quarters Ended
1999 2000
(in thousands)     Mar. 31     June 30     Sept. 30     Dec. 31    Mar. 31(1)     June 30(1)     Sept. 30(1)     Dec. 31
Net revenue  $ 49,048  $ 55,401  $ 59,770  $ 62,071  $ 59,282  $ 65,842  $ 69,724  $ 73,988
Operating profit 16,666 18,923 20,094 21,241 16,821 19,897 19,752 23,532
 
(1)   Amounts for the three months ended March 31, June 30 and September 30, 2000 have been restated from amounts previously reported to reflect our change in revenue recognition pursuant to SAB 101 effective as of January 1, 2000.

Seasonality
Our affiliated orthodontic centers have experienced their highest volume of new cases in the summer and other periods when schools are not typically in session. During these periods, children have a greater opportunity to visit an orthodontist to commence treatment. Consequently, our affiliated orthodontic centers have experienced higher revenue during the first and third quarters of the year as a result of increased patient starts. During the Thanksgiving and Christmas seasons, our affiliated orthodontic centers have experienced reduced volume and fourth quarter revenue for our affiliated orthodontic centers has been generally lower as compared to other periods. Seasonality in recent periods has been mitigated by the impact of additional orthodontic centers.

Liquidity and Capital Resources
Our development and acquisition costs, capital expenditures and working capital needs have been, and we expect will continue to be, financed through a combination of cash flow from operations, bank borrowings and the issuance of notes and shares of our common stock. We intend to continue to lease, rather than purchase, facilities for our affiliated orthodontic centers, to maximize our available capital.
     Our net cash provided by operations for 2000 was $39.6 million, an increase of 69.8% from $23.3 million for 1999, which represented an increase of 5.4% from $22.1 million for 1998. Due to a change of income tax payment methods, cash paid for income taxes during 1999 exceeded the 1999 provision by $7.0 million. Our working capital at December 31, 2000 was $39.6 million, a decrease of 61.3% from $102.3 million at December 31, 1999, including cash and cash equivalents of $4.7 million at December 31, 2000, compared to $5.8 million at December 31, 1999, primarily due to a decrease in service fees receivable, net of uncollectible amounts, to $35.4 million at December 31, 2000 from $87.6 million at December 31, 1999, as a result of the cumulative effect of our change in accounting principle effective January 1, 2000 pursuant to SAB 101.
     Our net cash used in investing activities for 2000 was $48.5 million, a decrease of 12.6% from $43.1 million for 1999, which represented a decrease of 0.2% from $43.2 million for 1998.
     Our capital expenditures consist primarily of the costs associated with the development of additional orthodontic centers. The average cost of developing a new orthodontic center in the United States is about $255,000, including the cost of equipment, leasehold improvements, working capital and start-up losses associated with the initial operations of the orthodontic center. These costs are shared by us and the particular affiliated orthodontist. We assist our affiliated orthodontists in obtaining financing for their share of these costs by providing a guaranty of loans from our primary lender. In some cases, we bear an affiliated orthodontist’s share of these costs until we are reimbursed by the orthodontist. At December 31, 2000, the outstanding balance of these amounts that we guaranteed was about $2.9 million, compared to about $5.0 million at December 31, 1999. We also intend to continue to make advances of about $40,000 to newly-affiliated orthodontists during the first year of an orthodontic center’s operations, which advances bear no interest and typically are repaid during the second year of the orthodontic center’s operations. We intend to fund these advances and any continued financing through a combination of bank borrowings, cash from operations and our net proceeds from this offering.
     During 2000, we entered into agreements to acquire the assets of, and affiliate with, 71 affiliated orthodontists operating in existing orthodontic practices at 55 locations, and made payments to orthodontists or orthodontic entities with which we affiliated in earlier periods, with a total acquisition cost of about $34.2 million, consisting of an aggregate principal amount of $1.3 million of promissory notes issued by us, an aggregate of 227,000 shares of our common stock and about $28.2 million of cash. At December 31, 2000, outstanding indebtedness under promissory notes we issued to affiliated orthodontists to acquire the assets of existing orthodontic practices was about $3.5 million, compared to about $8.2 million at December 31, 1999, with maturities ranging from one to three years and interest rates ranging from 7.0% to 9.0% per year.
     Our financing activities included the repayment of notes to banks and our affiliated orthodontists in the amount of $6.5 million for 2000, a decrease of 3.0% from $6.7 million for 1999, which represented a decrease of 14.2% from $7.9 million for 1998. Our financing activities also included proceeds from the issuance of our common stock under our stock purchase program and stock option plans in the amount of $4.3 million for 2000, a significant increase from $114,000 for 1999 and $595,000 for 1998, primarily due to an increase in the number of options exercised by our employees and affiliated orthodontists and amounts received under our stock purchase program for affiliated orthodontists.
     In October 1998, we entered into a $100.0 million revolving line of credit with a lending group that currently consists of First Union National Bank, Bank of America FSB, Bank One, N.A., Hibernia National Bank and Wachovia Bank, N.A. The line of credit provides an aggregate of $100.0 million for general working capital needs and expansion of the number of orthodontic centers, and bears interest at varying rates above the lender’s prime rate or LIBOR. Amounts borrowed under the line of credit are secured by a security interest in all of our assets, including our accounts receivable and equipment. At December 31, 2000, $57.4 million of indebtedness was outstanding under the line of credit, compared to $50.6 million at December 31, 1999. See Note 5 to our Consolidated Financial Statements that are included elsewhere in this Report.
     We expect that we will require cash in the future primarily for developing additional orthodontic centers, acquiring assets from and affiliating with additional orthodontists, capital expenditures, repayment of long-term debt, payment of income taxes and general corporate purposes. Our cash needs could significantly change depending upon our ability to recruit orthodontists, find appropriate sites, enter into long-term service or consulting agreements and acquire the assets of existing orthodontic practices. We believe that the combination of funds available under our revolving line of credit and cash flow from operations will be sufficient to meet our anticipated funding requirements for at least the next 12 months.

Forward-Looking Statements
Statements contained in this Report which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding the company’s future growth, profitability, earnings, quality of care, information systems and management structure, advertising, development and acquisition of additional Orthodontic Centers and affiliation with additional Orthodontists.
     Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include regulatory constraints, changes in laws regulating the practice of dentistry or the interpretation of such laws, competition from other orthodontists or practice management companies, the availability of suitable new markets and suitable locations within such markets, changes in the Company’s operating or expansion strategy, failure to consummate proposed developments or acquisitions, the ability of the Company to manage effectively an increasing number of the Company centers, the general economy of the United States and the specific markets in which the Company’s centers are located or are proposed to be located and other factors as may be identified from time to time in the Company’s filings with the Securities and Exchange Commission or in the Company’s press releases.