We are pleased to report that your company had another very productive and successful year. In describing our achievements, we have used a lot of superlatives in this annual report—adjectives such as sparkling and radiating. That’s because we continue to achieve excellent results year after year, a testimony to the fact that a proven operating strategy that is well-executed will succeed over time.
   Orthodontic Centers of America (OCA) continues to thrive and grow precisely because we have developed a sound, disciplined approach. We have not veered from our commitment to affiliating with top-quality practitioners, who offer high-quality service to their patients, and to delivering clear advantages to affiliated practices.
   As the market for orthodontics continues on a course of steady, predictable growth, we continue to take a focused and intelligent approach to growth. It’s an approach that has served us well in the past and will serve us well in the future.

2000 Financial results
We recently elected to change our revenue recognition policy to conform to the Securities and Exchanges Commission (SEC) Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements.” We have moved to a straight-line basis of revenue recognition, which we believe will enhance the clarity and simplicity of our financial statements. These changes are reflected in the financial statements for 2000 that appear in this year’s annual report.
   I am pleased to report another year of excellent results. For the year 2000, compared to pro forma 1999, revenues of $268.8 million were up 30.7 percent from prior year pro forma revenues of $205.6 million. Excluding the cumulative effects of changes in accounting principles, net income rose 44.7 percent to $47.8 million, and we achieved earnings per share of $0.96, compared with pro forma $0.66 in 1999. Pro forma 1999 amounts were calculated assuming our change in revenue recognition, effective January 1, 2000, pursuant to SAB 101, had been in effect during 1999.
   New patient contract dollars, the greatest predictor of future revenue, increased 33.9 percent during 2000 to a record $494.1 million, compared with $369.1 million in 1999.
     In 2000, our affiliated orthodontists achieved record patient case starts of 160,639, up 27.2 percent compared with 1999. This increase reflects our emphasis not only on opening new centers but on internal growth—building case starts for our existing affiliated centers. Comparable center net revenue growth, a principal measure of internal growth, was outstanding at 22.6 percent, continuing a strong trend.
   Our capital position remains strong. Cash flow from operations for year ended December 31, 2000, was a robust $39.6 million. For the first time since our IPO in 1994, we financed our domestic growth through internally generated cash flow. As our centers continue to ramp up and grow, we enjoy progressively greater levels of cash flow. We expect to continue the same robust pace in 2001.
   We are the leaders in an industry that is characterized by fragmented and underpenetrated markets. We see enormous opportunities for growth on a market-by-market basis, and we expect to grow by continuing to increase our affiliation with orthodontists who currently represent an 8 to 10 percent share of the U.S. market’s nearly $4 billion annual billings for orthodontic services. While only 200 orthodontists graduate each year from the nation’s residency programs, the demand for their services is growing rapidly, creating opportunities for internal growth through our affiliated practices. And, through our diligent recruiting efforts, we continue to attract new orthodontists around the nation.

A year of solid growth
We now have 417 affiliated orthodontic professionals and 592 affiliated centers in 43 states, Puerto Rico and Washington, D.C. and in three international markets—Mexico, Japan and, as of January 2001, Spain.
   We are fortunate to have three excellent avenues for growth. The first is internally driven related to growing revenues from our existing centers; the second source is revenue growth from building new centers or “de novo” growth; and the third is growth through affiliations with existing practices.
   Our strongest mandate is the latent potential for internal growth that lies within our large network of affiliated practices. We want all our centers to operate at full capacity, so there is a continual opportunity to grow. Our superior comparable center net revenue results indicate overwhelmingly that our growth initiatives are working. For orthodontic centers open throughout 1999 and 2000, net revenue during 2000 increased 22.6 percent from 1999.
 
 
Year ended December 31,
  (In thousands, except per share data) 2000 1999 1998
  Statement of Income Data:
  Net revenue   $ 268,836   $ 226,291   $ 171,298
  Operating income 80,002 76,924 54,286
  Income before income tax 76,271 74,720 54,566
  Net income (1) 47,772 46,514 33,813
  Net income per share (1) $ 0.96 $ 0.96 $ 0.70
  Average number of shares outstanding 49,845 48,643 48,502
  As of December 31,
  (In thousands) 2000 1999 1998
  Balance Sheet Data:
  Cash and cash equivalents $ 4,690 $ 5,822 $ 1,601
  Working capital 39,573 102,276 59,634
  Total assets 367,947 367,022 296,798
  Total debt 61,001 58,793 31,332
  Total equity 287,196 278,527 231,159
  As of December 31,
  2000 1999 1998
  Operating Data:
  Orthodontic centers 592 537 469
  Affiliated professionals 417 346 275
  Total case starts (2) 160,639 126,307 95,377


(1)  Before cumulative effect of change in accounting principle.
(2)  Presented for the year ended.

   We have designed several programs to increase the productivity and profitability of existing centers. First, as a result of developments in orthodontic technology, our affiliated orthodontists can increase the interval between patient visits without compromising the quality of care. Reducing the number of times a patient visits the center during the course of treatment provides time for the treatment of additional patients. Second, in those states where general dentists may perform certain orthodontic procedures, our affiliated orthodontists are now beginning to use general dentists as assistants. By year-end 2000, over six percent of our affiliated orthodontists had adopted this approach, which permits the orthodontist to focus on existing and new patients and dramatically enhances practice productivity. Going forward, we see a continued need for selective additions of general dentists. Third, to supplement our advertising program, we have implemented an internal marketing program to assist our affiliated practices in increasing patient referrals from existing patients and staff in addition to referrals from area dentists.
   Given our emphasis on growth, the intelligent use of capital is central to our philosophy. We are thoughtful, disciplined and strategic in our approach to growth. We set high standards for our affiliated orthodontists; we are measured in our approach to entering international markets; and we seek to grow the business, to the extent possible, by using existing assets, innovative techniques and by focusing on those markets where we already have affiliated practices.

A strategy for continued growth
We continue our strategy of entering large urban markets. While traditionally large markets have been difficult to break into, they offer an excellent growth opportunity because major metropolitan areas comprise 44 percent of the U.S. population.
   As we build our national brand identity, we significantly enhance our ability to move into major urban markets. We entered the Boston and Chicago markets during the second half of 2000 and expect to proceed with plans to extend our reach into these key markets during 2001. We expect to open 14 to 18 offices in Boston and Chicago by year-end 2002.
   Our approach to international growth exemplifies our overall strategy. We enter a new market, then proceed at a measured, controlled pace. Our philosophy is to start small, achieve an understanding of that market and then expand. In the Japanese market, 2000 was a year of sound progress; we learned a great deal about pricing, advertising and infrastructure issues. Year 2001 will be a year of expansion there. We have already begun to expand within the Mexican market, which we entered in 1999. We have made significant strides in expanding into Canada and hope to begin operations in 2001 in Alberta and Ontario. OCA Europe opened its doors in January 2001 with two affiliated practices in Spain.
     We continue to explore natural adjuncts to orthodontics at the discretion of individual practitioners and, again, on an exploratory basis. We continue to respond to the trend toward cosmetic dentistry and are gaining important experience through its introduction on a limited basis.
   BriteSmile, Inc. produces a proprietary teeth-whitening process that can make teeth seven to 10 times whiter in a single treatment, compared with the two- to eight-week series of treatments required by the traditional gel/tray whitening process. Unveiled in 1999, OCA’s BriteSmile program is on track with training and rollout. More than 100 BriteSmile units are in place in our affiliated centers, and we continue to gain experience with the BriteSmile process and to ramp up production.
   Similarly, Align Technology, makers of the Invisalign® system, a line of clear, removable orthodontic appliances for adults, debuted a national marketing campaign in 2000, and we now have a sizeable number of doctors delivering treatment with the Invisalign® system. Align Technology's strong marketing commitment has served to heighten awareness of orthodontic treatment in general and the availability of Invisalign®—an approach that is benefitting us.
   Proctor & Gamble’s Whitestrips have been introduced at many of our affiliated orthodontic centers. Our relationship with Proctor & Gamble is a good strategic fit. Proctor and Gamble’s strong brand identity and marketing prowess support our efforts to reach more people with innovative, new products and techniques.
   Finally, we continue to explore acquisitions that enable us to expand while maintaining our high standards. Our disciplined approach is reflected in our agreement to purchase certain assets of Apple Orthodontix, Inc., announced in April 2000. As part of the agreement, we acquired 12 Apple service agreements and added 22 superior orthodontists to the OCA network. Our commanding position in the industry enabled us to attract these top-quality practitioners on mutually favorable terms. We will continue to leverage this discipline intelligently going forward.
 
A strong business model
We believe we have an outstanding business model. We have developed the operating systems, the technology and the advertising and marketing programs to measurably improve business for our affiliated practitioners. Our specially designed centers and sophisticated proprietary computerized information systems enable affiliated practices to dramatically increase operating efficiencies. Our affiliated practices treated an average of 77 patients per nine-hour treatment day during 2000, compared with an average of 45 patients per day during 1998 in traditional practices.
   Our nationwide advertising program, designed to build brand identity in new and existing markets, is delivering new patients to our affiliated centers. Orthodontists who had been affiliated with OCA for at least one year generated an average of 538 new case starts during 2000, compared with the national average of approximately 200 new case starts per orthodontist during 1998.
   Although the U.S. economy appears to be slowing, our business shows no sign of abating. The results from our centers show continuing growth in the first quarter of 2001 despite visible changes in the economic climate.
   During the recession in the early 1990s, our affiliated centers grew on an incremental basis. We believe that’s due, in part, to the fact that affordability and quality are the hallmarks of our affiliated orthodontists’ services. We believe the marginal shopper is more likely to choose an OCA-affiliated orthodontist in a difficult economy, because their fixed fee-based approach, featuring no down payment and convenient monthly payments, spells value for the customer. As the economy slows, we expect that commitment to affordability to pay off in the continued, even growth of business.

In closing
We are proud to be affiliated with a superior group of orthodontists who continue to deliver high-quality treatment to patients in their communities. We will continue to focus on our core operations and to maintain the highest standards in recruiting new orthodontists, in expanding into new markets and in executing our international expansion program. And we will continue to take a disciplined, measured approach to growth that will pay off in long-term performance.

Sincerely,


Gasper Lazzara, Jr., D.D.S.
Chairman of the Board


Bartholomew F. Palmisano, Sr.
Chief Executive Officer and President